first blue home finance ltd Management discussions

FIRST BLUE HOME FINANCE LIMITED (FORMERLY KNOWN AS DEUTSCHE POSTBANK HOME FINANCE LIMITED) ANNUAL REPORT 2011-2012 MANAGEMENT DISCUSSION AND ANALYSIS Annexure- C The management of First Blue Home Finance Limited is pleased to present its analysis report containing expectations of the Companys businesses based on current environment. Statements in this analysis describing the Companys objectives, projections, estimates and expectations may be forward looking statements within the meaning of applicable laws and regulations. Actual results might differ substantially or materially from those expressed or implied. Important developments that could affect the Companys operations includes, significant changes in political and economic environment in India or key markets abroad, tax laws, litigation, labour relations and interest rate scenario. 1. ECONOMY AND INDUSTRY OVERVIEW The financial year 2011-12, was a year of moderate growth for India (GDP dipped to 6.1% in Q 3 of FY 12) with a challenging economic environment together with high fiscal deficit, ratings downgrade and high inflation. Indias economic growth is expected to remain robust in 2012 and 2013, despite likely headwind of double-dip recessions in Europe and the US, according to a United Nations annual economic report -World Economic Situation and Prospects 2012. The Indian economy is expected to grow between 7.7 per cent and 7.9 per cent this year. India is blessed with one of the fastest growing housing markets in the world. It is not only attracting domestic real-estate developers but also the foreign investors; particularly, the NRI community have the bulk of their investments in India in the housing market. The growth is attributed mainly to a large population base, rising income level, and rapid urbanization, according to RNCOS - a Industry Research Solution, research report, Indian Housing Sector Analysis. In line with the ongoing development exhibited by the housing construction industry in India, it is expected that the sector will overtake other industrial sectors in terms of contribution to GDP growth during the next few years. Further, FDI in Indias real estate and housing market multiplied 80 times between 2005 and 2010. Moreover, private equity funds are also venturing into development of their own housing projects in order to produce better returns for their investors. The Indian housing industry is one of the most underleveraged market in the world with mortgage to GDP ratio of only 7%. A modest 3% increase in mortgage penetration from current 7% to 10% will translate into the industry growth rate of around 20% p.a. for the next 5 years. However, it is expected to grow strongly in the medium to long term period due to strong macro economic and demographic factors. 2. PERFORMANCE The segment-wise reporting does not apply to the Company since revenues were derived from only one segment, i.e. housing finance activities. As a result, the Companys profit and loss account reflected the working of this business only. The operational and financial performance of the Company is summarized herein below: Operational Performance (Rs. in crore) Particulars 2011-12 2010-11 Growth (%) Sanctions, Disbursement & Loan Portfolio Sanctions 3,152.09 2,621.23 20 Disbursements 2,241.10 1,944.71 15 Disbursement to Sanction ratio (%) 71 74 EBDTA 141.85 115.07 23 PAT 101.15 80.45 26 Loan Portfolio 6,112.84 5,224.81 17 Average Loan Size 0.21 0.19 6 Re-payments & Non-Performing Assets Repayments 1,202.92 1,038.09 16 NPAs to Total Loan Portfolio (%) 0.84 0.83 1 Financial Performance Key elements of Profit & Loss Account for the year ended March 31, 2012 were: * Profit After Tax grew by 26%. * Pre-tax and Post-tax Return on Average Assets were 2.41% and 1.75% respectively * Return on Net Worth was 18% in the current year in comparison to 16.1% in the previous year. 3. OPPORTUNITIES AND THREATS Going forward, the management of your Company considers the following factors as opportunities and is taking requisite steps to explore them: * Increase in supply of affordable homes leading to more customers buying houses * Property prices have seen a significant increase over past one year which will result in higher borrower equity on the current portfolio * Ever expanding middle class population in the country * Focus on creating better infrastructure will lead to people moving from old houses to new locations offering better amenities * Governments focus on promoting affordable housing through various measures * Increasing trend of urbanization in India * Continuing gap between projected demand and availability of dwelling units * Large stock of unleveraged houses will result in higher business volumes in Loan Against Property segment which offers higher margins The management of your Company considers the following as threats: * Levy of service tax on construction services and increase in the circle rate would ultimately raise the price of Apartments * Non-availability of long terms funds for HFCs at competitive rates * Hike in rates of interest across the Board is a threat of delinquency because of higher EMIs/negative amortization. * Lack of clear land titles 4. FUTURE OUTLOOK According to National Housing Bank, there has been suppressed demand for home loans in the year 2011-12. It is basically on account of two factors: increasing interest rates and rising property prices. We expect that the retail housing market will end up the year registering 17-18% YoY growth. In 2012-13, the market is expected to grow, faster mainly on account of softening interest rates. There is at present an indication of falling interest rates. Going forward, the policy environment will support more growth and for which, lower interest rate will definitely be an important factor. Secondly, there is huge unsold inventory in the market. With increased demand, the absorption (of demand) can also be better. NHB see better outlook for housing finance market in FY13. It should bounce back to 20-21% (YoY growth) as against the normal range of 24-25%. There will be expansion in home loan market. 5. ASSET LIABILITY RISK MANAGEMENT (ALM) As a part of Risk Management and Control and pursuant to guidelines issued by NHB, the Company is using the ALM system for studying and analysing the Interest Rate Sensitivity (Gap Analysis), Maturity and Liquidity Analysis of Assets and Liabilities. Asset Liability Management Committee (ALCO) of the Board meets at frequent intervals to review the interest rate scenario and liquidity requirements. The Company has finalized and set the limits for interest rate and liquidity risks, which are monitored by ALCO on continuous basis. 6. PRUDENTIAL NORMS FOR HOUSING FINANCE COMPANIES (HFCs) NHB has issued guidelines to HFCs on prudential norms for income recognition, provisioning, asset classification, provisioning for standard, sub-standard, bad and doubtful debts, capital adequacy and concentration of credit/ investments. The Companys capital for the purpose of determining the capital adequacy comprises of Tier I and Tier II capital. The Tier I and Tier II capital were Rs. 813.38 Crore. The Companys capital adequacy is 15.46% as against the minimum requirement of 12%. The Company is in compliance with the limits prescribed by NHB in respect of concentration of credit/ investments. 7. INTERNAL CONTROL SYSTEM The Company has in place adequate system of internal control. These controls have been designed to provide a reasonable assurance that the companys policies and procedures are followed. Internal audit function ensures that the operating and business units adhere to systems and procedures of the company and also recommends improvements in operational processes. It has documented procedures covering all financial and operating functions. The company has strategically posted internal auditors at key centers, where audits are carried out concurrently. The Company currently has three RPC (Regional Processing Centers), eighteen Branches and eleven Head Office functions. The Audit of the respective RPC, Branches and Head Office functions are being carried out as per the Audit programme by the Audit Committee. The critical Audit observations are shared with the Audit Committee on quarterly basis. The Company has an extensive compliance reporting mechanism in place. The status of the Compliance of various regulations as reported by the Business and functions is placed before the Board on quarterly basis. The Company has a strong IT security system to ensure Information Security. Systems Internal Audit function provides regular feedback and recommendations to the Management and Audit Committees. Management and Audit Committee review the internal control system regularly and take corrective steps wherever necessary.