Woes for real estate lenders mount; Morgan Stanley cuts estimates and target price

Global financial firm Morgan Stanley has cut estimates and target price of real estate lenders, attributing the move to higher credit costs and lower PPoP (pre-provision operating profit ) of these NBFCs.

“The risk of multi-year woes for these NBFCs is mounting. The credit flow to developers has been weak for about a year given the funding issues at NBFCs. The slowing economy and increasing awareness of it could dampen home buyer demand further, thereby compounding cash flow issues of developers,” said Morgan Stanley.

In a report on September 9, Morgan Stanley said that the concerns for real estate lenders appear to be rapidly increasing and it sees a long period of adjustment for them, in terms of delivering, debulking and recognising bad loans and provision.

“We draw a parallel to India’s last corporate bad loan cycle when banks struggled with sticky infrastructure bad loans. Given limited disclosures on stress in the loan books, we assume about 10 percent of current developer books to turn bad for NBFCs and HFCs in our coverage that have aggressively grown in this space in recent years,” Morgan Stanley said.

“We assume nearly 1 percent of home loans and almost 2 percent of loan against property (LAP) turn bad. We assume a loss given default (LGD) of 50 percent, given the rising supply of bad loans,” it added.

Morgan Stanley has maintained ‘underweight’ view on PNB Housing Finance and Indiabulls Housing Finance and ‘equal-weight’ view on LIC Housing Finance but has downgraded Edelweiss to ‘equal-weight’ from ‘overweight’.

It cut the target price on PNB Housing Finance to Rs 550 from Rs 775, on Indiabulls Housing Finance to Rs 410 from Rs 600, on LIC Housing Finance to Rs 425 from Rs 500 and on Edelweiss to Rs 120 from Rs 235.


Funding to real estate has got constrained over the past year which has resulted in many projects being stuck because of a lack of funds to complete the project. “Unless there is directed policy action at stressed real estate assets (of which there hasn’t been mention so far), these assets could continue to remain stuck and lose more value,” said Morgan Stanley.

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