Housing Finance Companies Set for Growth in FY24 and FY25
Housing finance companies are poised for a 12-14% growth in Assets Under Management in the upcoming fiscal years, driven by a surge in housing loans and a revival in developer loans.
Riding the Wave of Growth
If you've been following the financial news lately, you must have heard the buzz around the growth prospects of housing finance companies (HFCs) in the fiscal years 2024 and 2025. According to CareEdge Ratings, HFCs are expected to witness a robust 12-14% increase in their Assets Under Management (AUM) during this period. This growth trajectory is primarily fueled by the continued expansion in housing loans and a promising comeback in developer loans.
As Gaurav Dixit, Director – BFSI Ratings at CareEdge, points out, the share of wholesale financing by HFCs is anticipated to rise in the medium term. However, cautious growth strategies will likely keep this share within the range of 10-12%. This prudent approach ensures that financiers maintain a healthy balance between risk and opportunity in the ever-dynamic financial landscape.
The Resilient Real Estate Sector
The residential real estate sector is currently experiencing a surge in demand, underpinned by strong macroeconomic fundamentals and various driving factors. These include improving affordability, increasing urbanization, a low mortgage-to-GDP ratio, favorable demographics, and supportive government policies. The shift in post-pandemic consumer behavior, favoring open living spaces and premium housing options, along with factors like low-interest rates and stamp duty rebates, further contribute to the sector's growth.
Strong Performance in the Housing Segment
In the fiscal year 2023, HFCs witnessed a 9% growth in their AUM, with the housing segment leading the way with a 13% expansion. On the other hand, the non-housing portfolio, including developer finance, saw a marginal contraction during the same period. As of March 2023, excluding HDFC, HFCs' outstanding portfolio totaled ₹7.4 lakh crore, with housing loans accounting for ₹5.5 lakh crore of this amount. In comparison, banks held housing loans worth ₹19.4 lakh crore, showcasing the significant role of HFCs in the housing finance landscape.
With a backdrop of robust residential sales and a shrinking pool of stressed developers, the share of developer financing is expected to rise gradually in the medium term. CareEdge predicts that the stressed wholesale assets as a proportion of HFCs' net worth will likely improve to around 10% by March 2024, indicating a positive trend in the sector.
Strengthening Financial Indicators
One of the key indicators of the health of HFCs is the Net Non-Performing Assets (NPA) to net worth ratio, which improved from 16.6% to 11.7%. Additionally, the Stage 3 provision cover ratio, estimated at 42% as of March 2023, is expected to maintain a healthy range of 44-46% in the near to medium term. Lenders are expected to strike a balance between growth and asset quality, especially with anticipated interest rate cuts in FY25 that may exert downward pressure on margins.
While Net Interest Margins (NIMs) may face marginal impacts, profitability is projected to stay strong, supported by portfolio growth, sound asset quality, and declining credit costs. Return on Total Assets (ROTA) is anticipated to either meet or slightly exceed pre-Covid levels, highlighting the resilience of the sector. However, regulatory changes, liquidity constraints, elevated interest rates, delayed resolutions in wholesale loans, and competition from banks pose potential risks to the sector's growth trajectory.
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