Mid- and small-sized HFCs could bear the brunt of rising interest rates


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Markets have been in turmoil since the Reserve Bank of India announced a surprise rate hike on May 4.

While the benchmark Nifty50 index has lost around 9% since then, individual housing finance companies have cracked as much as 36%.

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Investors have avoided housing finance companies, or HFCs, fearing that a sharp rise in interest rates and higher inflation will hurt demand for housing in the near term.

This, in turn, can have a ripple effect on the demand for real estate finance.

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Still, analysts believe that fundamentally strong HFCs would be able to weather the rising rate cycle better, even if they partially absorb rising interest rates.

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Talk to Trade standard Parag Jariwala – Director (Investments), WhiteOak Capital Management]said that the biggest HFCs like HDFC, LIC Housing have pricing power. They can pass on rate increases as long as the cost of funds remains competitive. Some HFCs have floating rate assets and fixed rate liabilities, he said. Margins can be protected.

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Mortgage rates were around 6.5% in April 2022, and now exceed 7%.

However, analysts believe they are still within comfortable limits, protecting the interest of buyers.

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That said, analysts warn that HFCs, which cater to the price-sensitive segment of affordable housing, could see some margin erosion in the short to medium term.

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Ashish Khandelia, founder of Certus Capital & Earnnest.me, said the home loan industry is very competitive. Many players are shifting their books to retail rather than business lending, he said. Some HFCs can partially absorb the price increase, which has an impact on margins.

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Kotak Institutional Equities expects the affordable HFCs under their coverage to experience a 10 to 70 bps year-over-year decline in net interest margin in FY23, and 20 to 100 bps additional in FY24.

According to the brokerage, “While there is room for a rate increase, most affordable HFCs have not passed the benefit of lower rates on to borrowers. As a result, they may be slow to pass on rate hikes”

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Overall, financials will remain on investors’ radar for the immediate future as the recovery in credit will be closely watched to gauge the health of the economy.

On Friday, inflation data from Japan, home sales data from the United States, and stock-specific actions domestically will guide the markets.

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