At the time when the NBFC sector is grappling with funding issue, IBHF is guiding for medium term loan growth of 20-25 percent which clearly signals its relatively strong liquidity position.
Indiabulls Housing Finance (IBHF) reported stable Q2 with net profit increasing 21 percent year-on-year (YoY) driven by robust loan book growth. The lender’s loan assets increased by a solid 29 percent to Rs 128,900 crore as at the end of September. The lender reported a stable spread of 3.24 percent, well within its guided range.
NBFC stocks especially those of housing finance companies (HFCs) have been at the centre of the sell-off in the broader market. IBHF’s stock corrected nearly 35 percent in intraday trade on September 21 and since then has been gyrating wildly on every fresh news around liquidity. For precisely this reason, we suggest investors wait until the dust settles around the liquidity situation.
Despite the fact that business fundamentals of IBHF such as loan growth, spreads, asset quality and capitalisation still look solid, future investment decision relating to IBHF is likely to be driven by how liquidity situation pans out for the NBFC sector and not the valuation of the stock per se. Given the heightened concerns around funding, we delve deeper into IBHL’s liquidity position.
Adequate liquid assets
IBHF is relatively better placed on the liquidity front as it has always followed a policy of maintaining around 12-15 percent of its balance sheet in liquid investments. Its liquidity position is supported by cash and investments to the tune of Rs. 21,250 crore in high-quality liquid assets (HQLA) excluding undrawn bank lines.
These HQLA mainly includes liquid MF units and G-secs and as per management complete portfolio can be liquidated within 7 days. These liquid investments remain a drag on profitability in a normal course of business as such investments offer a negative carry and the company may also have to bear mark-to-market (MTM) loss on the same if any. However, maintaining liquid investments helps in sailing through the crisis situation similar to the one faced by the NBFC sector today.
IBHF follows a liquidity framework guided by Basel III and in line with liquidity ratios prescribed for banks. In fact, IBHF’s liquidity coverage ratio (LCR) is at 401 percent which in case of most private banks is around 100-130 percent. Simply put, LCR of around 400 percent means IBHF’s HQLA is 4 times its next 30 days net outflow.
IBHF has unutilised bank lines to the tune of Rs 4,000- 5,000 crore. Most NBFCs hold liquidity in the form of unutilised/undrawn bank lines. However, there have been instances recently where NBFCs could not borrow from banks using the sanctioned lines. So while it is important to have quickly accessible bank lines and renew the same on a regular basis, liquidity back-up in the form of cash and equivalents is the best option in an uncertain market since it can be tapped on demand.
Risk of high mutual fund exposure well mitigated
Currently, a mutual fund is an important source of funding for IBHF contributing around 30 percent of its total borrowing which management expects to gradually reduce to around 20 percent.
Since September 21, IBHF could raise Rs 350 crore through commercial papers (CPs) and around Rs 580 crore of its paper traded in the secondary market. This indicates that the MFs are not completely averse to funding IBHF. As per the management, the NBFC sector is not facing a liquidity crisis but a crisis of confidence. So to instil confidence amongst mutual funds, it bought back Rs 1,834 crores of papers in past 3 weeks.
While IBHF has outstanding CPs of around Rs 15,000 crore, it has parked around Rs 11,000 crore of its liquid assets with mutual funds. Hence, the potential risk in CPs which emanates from the need to rollover and refinance on maturity is to a large extent being offset by the adequate liquidity cushion.
Growth guidance encouraging
IBHF’s loan assets have grown at a CAGR of 27 percent in last 7 years. Going forward, in the medium term, it expects to grow loan book by 20 percent - 25 percent. Such strong guidance on a relatively high base at the time when the NBFC sector is grappling with funding issue is very encouraging and speaks volumes about IBHF’s strong liquidity position. Having said that, management clearly mentioned that near-term (around 60 to 90 days) focus remains liquidity management.
Given the strong capital adequacy of over 20 percent, comfortable gearing below 6 times and top-notch credit ratings, management does not foresee any challenges on growth capital in near term (both in terms of availability and cost).
IBHF intends to meet a large chunk of incremental funding through securitisation and ECB route. In the first half of FY19, IBHF securitised loans worth Rs 5,000 crore and intends to continue it at an accelerated pace for the rest of the year. In the second half, it intends to securitise loans around Rs 8,000-10,000 crore. This shouldn’t be difficult considering banks like SBI are showing a keen interest in buying loan portfolio of NBFCs.
In today’s environment where access to funding has become a function of market confidence, IBHF’s quantum and quality of liquidity cushion is the key differentiator and should help it tide over the over the current funding crunch.
There has been a series of measures taken by regulators to improve systemic liquidity. For instance, RBI increased the “Facility to Avail Liquidity for Liquidity Coverage Ratio”, from the existing 11 percent to 13 percent of banks’ net demand and time liabilities, effectively easing up liquidity in the banking system. Further, it is consistently infusing liquidity through OMOs (open market operations). NHB too has increased refinancing limits for HFCs to Rs 30,000 crore from Rs 24,000 crore.
Despite all these, the situation in the funding market remains very volatile and the anticipation of stringent regulations will keep NBFC stocks on edge. Hence suggest investors tread carefully.
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