>INDIAN PROPERTY (HSBC)

■ Hike in provisioning for property loans from 0.4% to 1.0% could increase incremental funding cost by 60-65bps
■ Do not expect banks to pass on the incremental cost in the near term; move by RBI more a sign of caution
■ RBI measures will likely curtail run away property price growth, bringing expectations in line with our estimates

Risk weight on standard loans towards real estate sector increased from 0.4% to 1%. This move by the Reserve Bank of India (RBI) was on the back of the banking system’s increased exposure towards the real estate sector (up 42% y-o-y in Aug 2009) and the increase in restructured assets in the same sector over the past 12 months.

Impact analysis
Incremental funding cost could rise by 60-65bps. The majority of loans to borrowers (including developers) are typically linked to each bank’s Benchmark Lending Rate (BLR). Consequently if banks raise the BLR it will impact all borrowers and not specifically real estate developers. The recent move by the RBI will likely only impact incremental borrowings.

RBI policy should bring expectations in line with estimates

Do not expect banks to pass on incremental cost in the near term. Since the increase in provisioning requirement is for standard assets, it would be taxing on the borrower to pay a
higher credit cost despite meeting obligations on time. As a result we do not expect banks to
pass on the hike in the near term unless the asset/loans turn sub-standard. Our banking analyst expects the impact on banks of absorbing the higher provisioning will not be sufficiently meaningful to cause them to hike interest rates charged to large developers in near term.

Recent fund raisings have strengthened balance sheets. Most large property developers have raised fresh equity capital over the past 6 months thereby bringing down their
balance sheet leverage and leaving them in a comfortable position to fund growth over the next 2-3 years. We do not expect a 50-60bps interest rate hike to dent earnings or valuations meaningfully.

Policy move should bring expectations in line with our estimates. Property price appreciation of 15-25% in the past 6 months has been much ahead of our expectations and stock valuations have been implying further 25-40% price growth over the next 12-18 months. We believe the RBI’s attempt at increasing the cost of credit and curtailing incremental credit to the sector could lower expectations to be in line with our estimate of 10-15% over the next 12-18 months.

Stock implications: Indiabulls Real Estate and AnantRaj, with net cash positions, are relatively better placed against other coverage peers like DLF, Unitech and Housing Development and Infrastructure in the event of any rise in interest rates.

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