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Housing Finance Stocks Take a Beating
Sep 24, 2018

On Friday, 21 Sep 2018, the markets witnessed a flash crash in the afternoon when the Sensex suddenly crashed 1,100 points, before recovering some of the losses.

Yes Bank, one of the constituents of the Sensex, crashed 28.7% after the Reserve Bank of India cut CEO Rana Kapoor's tenure to just four months. He has to step down from the post by 31 January 2019.

Several brokerages that had a 'buy' view on the stock were quick to downgrade the stock after the crash.

My colleague Tanushree Banerjee, on the other hand, had been concerned about the quality of lending and management's approach in provisioning for non-performing assets. As such, she stayed away from joining the pack that was cheering the company's loan book growth. After Friday's crash, she views the situation differently and has published her latest view on Yes Bank.

But as you know, Yes Bank was not the only one at the heart of Friday's market panic.

The elephant in the room was the NBFC (non-banking financial companies) sector.

Several NBFC stocks came crashing down on Friday, Dewan Housing Finance Corporation Ltd being the leader of the pack. Nearly Rs 8,129 crore worth of the company's market cap got wiped out in a single session.

Housing finance companies came under sudden heavy selling pressure as interest rates on their debt spiked. As I mentioned earlier, one of the reasons for this sell-off was linked to the recent financial stress in the key Indian shadow bank Infrastructure Leasing & Financial Services (IL&FS) Group.

Recently, IL&FS and its subsidiaries were downgraded directly from the highest credit rating "AAA" to "Junk". This has led to nervousness about the credit profile of other private issuers, especially NBFCs. Many investors are now rushing to sell debt securities of various housing finance companies which are heavily dependent on debt refinancing.

It must be noted that IL&FS has missed payment on more than five of its obligations since August 2018. It has total debt of US$ 12.6 billion, of which 61% is in the form of loans from banks and other financial systems.

According to Moody's Investor Services, IL&FS's outstanding debentures and commercial paper accounted for 1% and 2%, respectively, of India's domestic corporate debt market as of 31 March 2018. Its bank loans made up about 0.5% to 0.7% of banking system loans.

There are concerns that the defaults by IL&FS could cause a contagion in the Indian financial sector.

Data Source: Petroleum Planning & Analysis Cell

This Chart Of The Day was published in The 5 Minute WrapUp - 7 Macro Factors Hurting Indian Stocks... and Two Actions to Sail Through It

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