«MR. ISHANK KUMAR – UBS SECURITIES ANALYST: MANAGEMENT: MR. GAGAN BANGA - VICE CHAIRMAN AND MANAGING DIRECTOR - INDIABULLS HOUSING FINANCE LIMITED ...»
“Indiabulls Housing Finance Q2 FY2017 Earnings
October 21, 2016
MR. ISHANK KUMAR – UBS SECURITIES
MANAGEMENT: MR. GAGAN BANGA - VICE CHAIRMAN AND
MANAGING DIRECTOR - INDIABULLS HOUSING
MR. ASHWINI KUMAR HOODA - DEPUTY
MANAGING DIRECTOR - INDIABULLS HOUSING
MR. SACHIN CHAUDHARY - EXECUTIVE DIRECTOR-
- INDIABULLS HOUSING FINANCE LIMITED
MR. MUKESH GARG - CHIEF FINANCIAL OFFICER -
INDIABULLS HOUSING FINANCE LIMITEDMR. PINANK SHAH - HEAD, TREASURY -
INDIABULLS HOUSING FINANCE LIMITED
MR. RAMNATH SHENOY - EXECUTIVE VICE
PRESIDENT, INVESTOR RELATION - INDIABULLS
HOUSING FINANCE LIMITED
Should you need assistance during the conference call please signal the operator by pressing “*” then “0” on your touchtone phone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Ishank Kumar from UBS Securities. Thank you and over to you Sir!
Ishank Kumar: Good evening everyone and thank you for joining us today. I welcome the management team of Indiabulls Housing Finance. We have with us Mr. Gagan Banga, Vice Chairman and Managing Director, Mr. Ashwini Hooda, Deputy Managing Director, Mr. Sachin Chaudhary, Executive Director, Mr. Mukesh Garg, Chief Financial Officer, Mr. Pinank Shah, Head, Treasury and Mr.
Ramnath Shenoy, Executive Vice President Investor Relation. I now invite Mr. Banga to provide key highlights of results. Over to you Sir!
Gagan Banga: Thank you. A very good day to all of you and I welcome you to the Q2 and first half financial year 2016-2017 earnings call. To start of I am extremely proud to tell you that both qualitatively and quantitatively this has been the best quarter in our operating history. At the end of the quarter we are in a position to re-emphasize our focus on the affordable housing opportunity.
The opportunity is scaleable and will build a sustainable and profitable business for us much in line with what we have created over the last 28 quarters. The objective for us and so to say our mission 2020 is to have housing loans form two-thirds of our loan assets from the current approximately 54%, we will do this by expanding into the new cities, we are launching today a new product called smart city home loans and we would also be expanding the breadth of our existing home loan offering where we are increasing our average ticket size expectation from the current Rs.25 lakhs to Rs.28 lakhs and increasing our focus area from Rs.20 to Rs.40 lakhs to Rs.20 to Rs.50 lakhs.
Our return to equity will again be supported by home loans, which are a capital efficient structure and is also extremely scaleable. This capital will be stretched out further and would be frugally utilized.
Our growth is driven by our core home loan business and I am very pleased to announce that we are expanding our home loan range to smart city home loans. This product is for the emerging smart cities and is 100-city roll out opportunity. We will do under this product home loans are between 10 and 40 lakhs in the emerging smart cities. We have already expanded and reorganized our mortgage
team and are capacitized for this business after having tested this for the last three years. This product should start contributing to approximately 15% of our home loans business in the next 12 months.
This is clearly a very large new opportunity that we are starting to tap.
In the locations that we are already present we will target a wider ticket size range than we have done in the past while in the past we were mainly looking at home loans of between Rs.20 and Rs.30 lakh, we will now target two ticket sizes this will go up to Rs.50 lakh. This will address a larger portion of the prime mass-market affordable loans. We are fully geared up and with expanding home loan we should cross Rs.1 Lakh Crore of balance sheet size that is one trillion of balance sheet size within the current financial year. In increasing the proportion of housing loans within the total loan our spreads would be sustained. In fact as we have gone about conducting ourselves in this manner we have since January of 2016 been able to expand our spreads by 4 basis points despite a significantly larger share of housing loans.
The reason for this is coming from the continuing efficiency that we get on the liability side. Our big success for this quarter and half year was the liability side of the balance sheet in which for the half year ending we have raised Rs.195 billion of bonds, which was greater than Rs.173 billion of bonds raised in the combined period of fiscal 2015 and 2016. We through the course of the quarter raised Rs.13 billion from rupee denominated masala bonds and Rs.70 billion through a public issue of bonds, both of which have truly broad based and diversified our funding mix and given us access to an investor community, which otherwise we were not being able to access. We were also only the third Indian company to be able to issue masala bonds out of India and second in the NBFC HFC space, both the masala and the bonds listed under the public issue window are trading extremely well in the secondary market and that leaves us very optimistic that we should be able to come back with both instruments within the current fiscal year obviously market conditions liquidity and interest rates permitting.
As a consequence of the large bond issuance for the first time in our operating history term loans form less than 40% of our funding mix. Some of you may recollect this was set as a business goal to be achieved by end of financial year 2018, so we have been able to prepone our business goal and a very significant business goal by about 1.5 years. Term loans as we speak are between 80 and 100 basis points more expensive than bonds. Acceleration in our bond issuances has ensured a drop in our cost of funds such that margin expanded despite an increasing share of housing loans in our books.
Over a period of time as the bond franchise has evolved it is now both diversified and sustainable.
With the masala bond piece we have been able to tie a tap into the vast international investor class and the public issue of bonds has given us access to individuals in the Indian scenario close to about 30% of the issue was subscribed to by individuals hence both of these first time issuances have opened up avenues to a near endless source of capital in the form of both international investors as well as the Page 3 of 20 Indiabulls Housing Finance Limited October 21, 2016 individuals within our country. Another key enabler to our housing loan expansion and foray into the new cities with smart city home loans is our e-home loan platform, which was launched last quarter.
Within three months of launch 11% of our home loan sourcing is now from e-home loans. E-home loans along with the app-enabled process functionality on handled for our sales, credit, technical and legal work force forms a seamless end-to-end credit appraisal and loan fulfilment platform. This is enabling us to expand into new cities with a technology levered lean branch model and bringing in true efficiencies of scale leading to a steady decline in processing cost for file and subsequently decline in our cost to income ratio, so while we role out this 100 branch product we will continue to see a decline in our cost to income ratio because we are taking a lot of our processes digital and online. E-home loans also vastly increases customer convenience and application form can be filled and submitted in under 30 minutes today and in our next version we will be bringing that down to 5 to 7 minutes and that next version should be launched within the next four months.
Vital information is also gathered directly from sourced databases and automatically populated in the credit decisioning workflow. Customer ID and address verification is done directly from the Government of India’s UIDAI Unique Identification Authority of India database through a tie up with them. Tax filing, salary and income information is pulled from the tax database through a tie up with NSDL. Bank statements are directly accessed from customer bank through an application. Thus the scope of fake information or fraudulent documents getting submitted and processed is greatly reduced. The whole process also reduces human and data entry errors and other operational risks. The credit team is also able to focus on appraisal and underwriting and spend less time on time-consuming data entry.
Spreads will remain stable on the back of accelerating fall in cost of our debt despite an increasing home loan book. The ROA will be supported with operating expenses further moderating both as a result of technology, which I had explained a short while back, the rising scale of productivity and because housing underwriting is inherently less cost intensive as compared to other products such as LAP. We expect cost to income ratios to drop down to 12% levels by financial year 2018 and get to the 10% handle by financial year 2020.
Another big boost to our return on asset will come from declining credit cost across various classes of lenders housing loans have the lowest NPA levels and that will play out in our credit cost. Standard asset provisions are at 40 basis points are also significantly lower than other loan types. Housing loans are also extremely capital efficient with a risk weight of only 35%. The capital utilization is most frugal when compared to other loan types, which have a 100% risk weight. We are also the largest seller of mortgage loans and pools of sub Rs.28 lakhs housing loans are most in demand, which is our area of focus.
Page 4 of 20 Indiabulls Housing Finance Limited October 21, 2016 Given our emphasis on housing loans and given the success that we have achieved in building our retail franchise, it gives me immense pleasure to announce that Sachin Chaudhary who has set up this business for us over the course of the last 11 years is being elevated to a board position. The Board of Directors today approved his appointment. This will be subject to regulatory and shareholder approval. Sachin is both a friend and a valued colleague and has been the driving force behind Indiabulls Housing Finances retail lending journey. Sachin leads a very stable team of retail mortgage business leaders most of who have been with Indiabulls since we began retail mortgage lending 11 years ago. He has complete operational responsibility for the retail mortgage P&L and his elevation to the board reemphasizes our focus on housing loans. All in all we are fully geared up for and with expanding home loan book to cross Rs.1 lakh Crore within the current financial year and that is an important milestone that we hope to achieve very, very shortly.
Now moving onto specific numbers we continue to remain on our guided target of profits with PAT of the first half at 13.14 billion up from 10.67 billion in the first half of the last fiscal, which is a growth of 23.2%. For Q2 our PAT is 6.84 billion growth again a little over 23% from 5.56 billion. We are pleased to announce that we have declared a second interim dividend for shareholders of Rs.9 per share in line with a dividend payout policy. Our loan book at the end of the first half stood at 753 billion as compared to 582 billion at the end of the first half of fiscal 2016, which is a growth of nearly 30%.
We carried a cash of 205.92 billion in the form of cash and cash equivalents and investments in liquid instruments. Our liquidity levels have been elevated through the quarter due to macro and global concerns at the start of the quarter followed by large private masala and public issuances towards the second half of the quarter. This higher cash balance is reflected in the other income line, which is higher by about Rs.140 Crores compared with the last quarter. This goes along with interest expenses to some extent. The actual net gain has been used to increase provisions resultantly net credit cost is higher by about Rs.20 Crores from sequential previous quarter and Rs.30 Crores from the quarter the year before. We have set aside on the basis of treasury gains and additional Rs.30 Crores of excess provisions, which will come in handy in due course of time and go towards our objective of building up an extra provision pool. We have also crossed for the first time 150% coverage on our gross NPAs and we will continue to invest in our excess provision pool till the time that it reaches roughly Rs.600 Crores as we speak it stands at about Rs.330 Crores.
Our asset mix at the end of half-year splits broadly into 54% home loans, 24% LAP and 22% of corporate mortgage loans. Our housing loan book has inched up to form 54% up from 49% at the end of Q2 fiscal 2016. We are poised to make the most of the growth opportunities in the housing sector and will grow faster than the market as our market share expands from the present 5% to 6%.
Resultantly the composition of housing loans within the total loan asset book will continue to inch up
as guided by the end of fiscal 20 will get to 66% of our loan assets. This is up from our earlier guidance of 60% and a result of sooner than expected shift in funding mix towards bonds.