Mumbai: The merger of Housing Development Finance Corp (HDFC) with HDFC Bank has opened up space for other mortgage lenders to raise funds from the debt market at a cheaper rate as more money is now available for other companies, market participants said.
The biggest beneficiary of HDFC’s exit, which used to corner more than half of the market fund, is likely to be LIC Housing Finance – the largest AAA pure-play home financier currently.
“After HDFC’s merger with HDFC Bank, the total number of issuances has drastically come down. Yields have definitely come down following the merger because of the absence of HDFC, which was the benchmark for AAA rated home financiers. Now that has been replaced by LIC Housing Finance,” said Venkatakrishnan Srinivasan, founder of Rockfort Fincap LLP.
From a spread of around 25 basis points over the benchmark NABARD securities prior to the HDFC merger, the gap has now narrowed to around 14 to 15 basis points for bonds issued by AAA rated housing finance companies, despite the RBI’s rate hikes and steps to drain out surplus liquidity from the banking system, dealers said. One basis point is 0.01 percentage point.
On Wednesday, NABARD’S three-year bond was trading around 7.62-7.64% in the secondary market, while Bajaj Housing Finance’s three-year bonds were around the 7.80% level, treasury executives said. Last week, LIC Housing raised Rs 1,784 crore through the reissue of bonds maturing in 2025 at an interest rate of 7.78%.
“We are already seeing some impact in our spreads and though it is still early days to quantify we expect the impact on our cost of funds to be sustainable for sometime now. We will be getting the benefit of lower cost of funds in the time to come,” said a senior official from LIC Housing.
Ajay Manglunia, head investment grade group, JM Financial said LIC Housing is already trading at 10 to 15 basis points below erstwhile HDFC rates.
In the long term the benefits of lower rates and more funds will also percolate to non AAA companies besides, Tata Housing, Bajaj Housing and LIC Housing, dealers said. “Not only funds from the market, HDFC’s absence will also be beneficial for HFCs wanting to raise funds from the regulator National Housing Bank (NHB) because even there HDFC was dominant. Just a couple of months ago about Rs 5000 crore was distributed among four HFCs as NHB had some extra liquidity,” said a CEO of a mid-sized mortgage lender.
Market participants say the impact of HDFC’s exit will be felt strongly as time progresses. “Right now RBI has allowed grandfathering of these bonds and HDFC raised a huge amount last year, so far people have exhausted their HFC investment limits but as these bonds mature and new money comes in we will see the limits open up for other HFCs,” said Manglunia. The benefits of lower yields will also move beyond AAA HFCs as interest rates begin to fall.
