lap leap of non banks presentation new

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F o r I n t e r n a l U s e O n l y –

N o t F o r E x

t e r n a l D i s t r i b u t i o n

© 2 0 1 4 C R I S I L L t d .

A l l r i g h t s r e s e r v e d .

The LAP Leap of Non-banks : Potential Hurd les Ahead?

Pawan Agrawal

Chief Analytical Officer

CRISIL Ratings

July 1, 2015

1

Hosted by:

Manish Saraf

Associate Director

CRISIL Ratings

Rupali Shanker

Director

CRISIL Ratings




N o t F o r E x


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Key messages

Loans against property (LAP) on a roll, healthy growth to continue

– Assets under management (AUM) will double to Rs.5.0 lakh crore by

March 2019 from Rs.2.3 lakh crore as on March 2015

– Non-banks (NBFCs and HFCs) will continue to grow faster than banks

Business dynamics changing for non-banks as competition intensifies

– Increasing appetite for higher loan-to-value (LTV), and bigger ticket-size loans

– Pricing is under pressure, and yields are declining on incremental business

Asset quality remains susceptible to rising risks

– Lagged delinquencies reached 3.0% as on March 2015, from 1.9% two years ago

– Higher balance transfers resulting in lower repayment track record

– Lack of standardised valuation practices

LAP to remain among the most profitable asset classes

– RoA of 3.2% for 2014-15; expected to hover at 2.5% over medium term

However, lenders need to be cautious

– Greater discipline in credit practices will be the key to continued success

2




N o t F o r E x


© 2 0 1 4 C R I S I L L t d .


LAP on a roll, healthy growth to continue




N o t F o r E x t e r n a l D i s t r i b u t i o n

© 2 0 1 4 C R I S I L L t d .


LAP AUM to reach Rs 5.0 lakh crore by March 2019

4

AUM of banks and non-banks continues to witness healthy growth

Lenders’ preference for secured financing; slower growth in other segments

‒ Further, stable property prices have provided comfort

For borrowers, LAP enables greater monetisation of property

‒ Increased loan amount and longer tenures are the primary benefits

Large market opportunity to help sustain LAP growth

‒ ~Rs.10 lakh crore of bank loans in the Rs.25 lakh - Rs.10 crore ticket size offers vast potential

‒ Un-banked SMEs in Tier-II and Tier-III towns also offer good business potential

Source: CRISIL Estimates

1.3 1.72.3 2.7

5.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Mar-13 Mar-14 Mar-15 Mar-16 (P) Mar-19 (P)

( R s

l a k h c r o r e

)

4-year CAGR: 22%3-year CAGR: 30%

/ /





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Non-banks have helped in scale-up of LAP business

5

Non-banks expected to gain market share…

Non-banks have popularised LAP by offering differentiated value proposition

LAP will also remain a focus area for top private sector and foreign banks

Public-sector banks expected to grow at a slower pace


…their growth will remain higher

36

39

32

24

44

33 32

28

24

2825

23

15

20

25

30

35

40

45

50

2012-13 2013-14 2014-15 2015-16 (P)

%

NBFCs HFCs Banks

52 50 49 49 45

26 28 29 29 31

21 22 22 23 24

1.3 1.7 2.3 2.7 5.0

-60.0

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

0

20

40

60

80

100

120

Mar-13 Mar-14 Mar-15 Mar-16 (P) Mar-19 (P)

%

Banks NBFCs HFCs Total LAP AUM (Rs. Lakh Crore)

/ /





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Business dynamics changing for non-banks,

as competition intensifies





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Total LAP AUM for non -banks (Rs lakh crore) Numb er of players with AUM > Rs 1,000 crore

1.20.60.2

March 2010 March 2013 March 2015

6 players 16 players 23 players

Evolving market landscape for non-banks

7

Business opportunity has meant more large-sized players trooping in

Source: CRISIL EstimatesGrowth accelerating in smaller cities


High share of intermediaries in disbursements

9075

65

1025

35

0

25

50

75

100

Mar-10 Mar-13 Mar-15

%

Metro and Tier I cities Tier II

5060

70

5040

30

0

25

50

75

100

2009-10 2012-13 2014-15

%

Third party intermediaries In-House





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Competition forcing non-banks to take more risks

8

Source: CRISIL EstimatesRising median ticket sizes


Increasing share of commercial property

Increasing LTV on new lending Declining yields on new lending

~40-45

~50-60~60-70

0

25

50

75

100

2009-10 2012-13 2014-15

%

85 8070

15 2030

0

25

50

75

100

2009-10 2012-13 2014-15

%

Residential Commercial

0.5

0.91.2

0.0

0.3

0.6

0.9

1.2

1.5

2009-10 2012-13 2014-15

( R s c r o r e

)

16-17%15-16%

13-15%

10

12

14

16

18

20

2009-10 2012-13 2014-15

%





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Asset quality remains susceptible to rising

risks

9





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Lagged delinquencies reflect increasing risks

10

Delinquencies in LAP materially more than home loans

2-year lagged delinquencies in LAP almost 3x that of home loans

Delinquencies trending towards that of SME portfolio of banks

‒ 90+ dpd in banks’ SME portfolio crossed 5% in 2014-15

However, delinquencies to remain lower given the property-backed nature of loans

Source: CRISIL Estimates for non-banks

0.8

1.41.7

2.01.9

2.7

3.03.3

1.1

1.1

1.01.1

0.4

0.9

1.4

1.9

2.4

2.9

3.4

3.9

Mar-13 Mar-14 Mar-15 Mar-16 (P)

%

90+ dpd (LAP) 2 year lagged 90+ dpd (LAP) 2 year lagged 90+ dpd (Home Loans)

2 year lagged delinquencies = 90+ dpd (t) / AUM (t-2)





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CRISIL’s risk continuum for major retail asset

classes

11

High Risk Medium Risk Low Risk

Two-

wheelers

New-car

loans

Home

loans

Gold

loans

LAS

Used-car

loans

New CV

Tractor

CESMEThree-

wheelers

Consumer

durables

Credit

cards

Personal

loans

Used CVsLAP

In the increasing order of risk





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For LAP, risks building under the surface

12

S.No Risk factor Implications Risk Zone

1 High balance transfer Low seasoning of portfolio

Lower borrower equity

2Higher LTV coupled with high ticket

size Adverse impact on recovery in case of stress

3 Non-standardised property valuation Over-valuation may lead to higher exposure

4

Increasing proportion of commercial

property

Higher risk in assessing property value

Lower emotional attachment

5 Cash-flow based assessment Ability of lender to adequately factor in assessed

income

6 Post-default recovery challenges Currently, long and tedious process

However, access to SARFAESI to help

7 Lack of end-use monitoring

Possible stress on asset quality in slowdown

8 Sharp fall in property prices Situation of market-wide stress is rare

9 Regulatory environment Possibility of regulatory tightening/enhanced disclosures






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Balance transfers camouflage true asset quality

13

Higher pre-payment rates for LAP in CRISIL-rated mortgage pools

On average, ~30% of outstanding portfolio gets churned among lenders in a year

‒ Re-leveraging for the borrower

‒ Lower-than-optimal borrower equity

Leads to favourable terms for borrowers

‒ Due to top-up and/ or lower interest rate from new lenders

Third-party intermediaries playing a larger role in balance transfers

‒ High incentive for loan originations

14

26

37

9

16

27

0

10

20

30

40

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

P r e p a y m e n

t R a

t e ( %

)

Months post secur i t isat ion

LAP pools Home Loan pools






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Underwriting practices that are leading to risks (1/2)

14

Increase in share of higher LTV and ticket sizes

Around one-third of the portfolio is in large ticket size or high LTV categories

Improper valuation potentially distorts LTV and ability to price risk appropriately

Challenges arise from:

‒ Scarcity of well-trained property valuers

‒ Lack of reliable secondary market prices

Title search and verification process equally critical


LTV

Ticket size (Rs.)< 50% 50% - 65% > 65%

<50 lakh

~65% ~15%50 lakh – 1 crore

1 crore – 2 crore

> 2 crore ~15% ~5%


Lack of standardised property assessment practices




N o t F o r E

x t e r n a l D i s t r i b u t i o n

© 2 0 1 4 C R I S I L L t d .


Underwriting practices that are leading to risks (2/2)

15

Increasing share of commercial property as collateral

Funding against commercial property leads to:

‒ Longer recovery time in case of stress sale

‒ Higher linkage to macroeconomic conditions

However, lower LTV compared with residential property provides greater comfort, for now

Adequacy of borrowers’ cash-flow assessment

Higher reliance on assessed income by non-banks compared with banks

Appropriate assessment of cash flows critical





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Potential risks after disbursements

16

End-use monitoring

End-use monitoring needs to be enhancedsignificantly

‒ Probability of higher stress in cases where

end-use of funds is not for business use

‒ Potential fund diversion to finance

promoter’s personal investments in real

estate and capital markets

Fall in property prices

Situation of market-wide stress is rare

‒ Portfolio diversification across cities and penetration in Tier II / III cities will reduce risks

However, recent decline in some micro-markets have raised caution


Challenges in post-default recovery

Unlike other retail assets, property isrelatively less liquid

‒ Involves higher cost and longer resolution

time, especially for high value properties

‒ Higher cash component in real estate deals

constrains lender’s ability to sell property

Access to SARFAESI will help improverecovery process




N o t F o r E


© 2 0 1 4 C R I S I L L t d .

A l l r

i g h t s r e s e r v e d .

LAP to remain among the most profitable

asset classes

17




N o t F o r E


© 2 0 1 4 C R I S I L L t d .

A l l r


Profitability to remain healthy, but likely to moderate

18

Increasing competition and higher borrowing costs have impacted margins

‒ Yields to decline further, settle at ~12.5 –13.5%

‒ Lenders targeting newer borrowers and geographies to partly mitigate pressure on yields

Operating efficiencies to improve going forward

Credit costs to rise as a result of portfolio seasoning and increasing risks

‒ Any sharper increase in delinquencies (under stress case) will adversely impact profitability


* Net interest margin = (Total income –

Interest expense) / Average assets

2010-11 2014-15 2018-19 (Base case)

NIM * 7.8% 6.3% 5.3% + 0.30%

Opex 1.5% 1.3% 1.1% + 0.10%

Credit cost 0.2% 0.4% 0.6% + 0.20%

Post-tax RoA 4.2% 3.2% 2.5% + 0.20%




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LAP remains among most the profitable asset classes

19

Source: CRISIL EstimatesRoA: Gold finance business

RoA: Return on assets; RoMA: Return on managed assets; on a steady state basis through the cycle

RoA: Home loans business

RoA: LAP business RoMA: Vehicle finance business


5.3%

2.5%

2.5%

1.1% 0.6%

1.1%

0%

2%

3%

5%

6%

8%

9%

NIM Opex Credit Cost Tax Post-TaxRoA

6.4%

2.2%

2.2%

2.2%

1.0%1.0%

0%

2%

3%

5%

6%

8%

9%

0%1%2%3%4%5%6%7%8%9%

10%11%12%13%14%15%16%17%18%19%20%21%22%23%24%25%26%27%28%29%30%31%32%33%34%35%36%37%38%39%40%41%42%43%44%45%46%47%48%49%50%51%52%53%54%55%56%57%58%59%60%61%62%63%64%65%66%67%68%69%70%71%72%73%74%75%76%77%78%79%80%81%82%83%84%85%86%87%88%89%90%91%92%

93%94%95%96%97%98%99%

100%

NIM Opex Credit Cost Tax Post-Tax

RoMA

8.7%

2.59%

2.6%

4.5%

0.5%

1.1%

0%

2%

3%

5%6%

8%

9%

NIM Opex Credit Cost Tax Post-TaxRoA

3.0% 2.4% 2.3% 1.6%

1.6%0.6% 0.2% 0.7%

0%

2%

3%

5%

6%

8%

9%

0%

1%

2%

3%

NIM Opex Credit Cost Tax Post TaxRoA




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Conclusion

Healthy growth in LAP segment to continue, given large market opportunity

Profitability to remain healthy, despite moderation over medium term

Lenders need to be cautious of emerging risks, and should focus on

– Controlling LTVs

– properly assessing borrower cash-flows

– practice stricter valuation regime, and

– enhancing portfolio monitoring

Key monitorables

– Ability to manage portfolio through weak property price cycles

– Success in repossession and recovery from high ticket size properties

20




N o t F o r E


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A l l r


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N o t F o r E


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A l l r


Business model among market participants

Particulars Non-banks Private/Foreign banks Public-sector banks

End-use of Funds As term loan for business or

debt consolidation

Other purposes like

investment, etc

As term loan for business As term loan for business

(or long-term working capitalloan in some cases)

Credit Assessment Customised assessment

based on understanding of

borrower cash flows

Primarily based on

documented income of

borrower; some proportion

based on customisedassessment

Basic cash flow assessment

based only on documented

income

LTV 60-70%

(upto 75% in some cases)

50%-60% 50%-60%

Yield on Current

Disbursements

13.0% - 15.0% 11.5% - 13.0% 12.0% - 13.0%

Turnaround Time 7 days – 15 days ~15 days ~15 days - 1 month

(relatively lower than SME

assessment cycle)

Origination Largely through

intermediaries

Both branch-based and

through intermediaries

Largely branch-based

lap leap of non banks presentation new

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