Banking
Fixed deposits – Nationalised banks offer better interest rates than private banks

Interest rates on fixed deposits have been dropping for over a month. Where should you park your money? Nationalised banks are better options compared with private banks 

 
You may be searching for higher interest rates to lock your savings for one year or more. Over the last one month, long-term fixed deposits (FD) rates have been on a decline. It started with State Bank of India (SBI) slashing the rates, which now stands at 8.5% p.a. for any FD term of one to 10 years. The long-term FD rates of SBI are less competitive when compared to many other nationalised banks, which still give 9.25%-9.35% p.a.
 
Bigger private sector lenders like ICICI Bank, HDFC Bank and Axis Bank also moved quickly to adjust their rates, which are usually 0.25% to 0.5% higher than SBI rates. The maximum rates with ICICI Bank and HDFC Bank are 8.75% p.a.; while Axis Bank offers 9% p.a. It means nationalised banks are still a better bet for higher interest rates when compared to big private banks. 
 
After a delay, smaller private players like Kotak Mahindra Bank, YES Bank, Karur Vysya Bank and IndusInd bank lowered their rates to 9%-9.25% p.a. Till 4th October, cooperative bank like Saraswat Bank was offering 10% simple interest paid quarterly, which is now reduced to 9.25%. While locking at 10% is not possible today from well known banks, nationalised banks can get you 9.3% to 9.35% interest for a FD of one to two years tenure, which is a good option.
 
Few cooperative banks are offering 9.75% to 10.25% interest rate on FDs today. But safety of your funds should have higher priority than earning 0.5% to 1% more interest. Moneylife foundation highlights this point in ‘How to be safe with your money’ seminars.
 
Moreover, smaller cooperative banks can charge higher penalties for premature withdrawal and therefore liquidity of the FD before maturity can be a concern. For example, Thane Janata Sahakari Bank does not allow premature withdrawal, which is a big drawback and risk for saver.
 
Ensure that your FD penalty clause for premature withdrawal is not worse than the industry standard which is: “If the depositor opts for premature closure, 1% penal interest shall be charged on the rate applicable for which the deposit remained with the bank.” 
 
Any wording better than this for long-term FD of one year or more will be to the advantage of the saver. Bank of Maharashtra charges no penalty for FD up to one year term. SBI charges 0.5% penalty for FDs of one year or more duration that is less than the rate for which deposit remained with the bank.
Read this space regularly for more articles on RD, debit cards, Know-Your-Customer (KYC) requirements, lockers, RTGS, NEFT, online access and transfers, etc.
 
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Is LIC Housing Finance undervalued compared to HDFC?

LIC Housing Finance trades at 50% of the book value of HDFC which is excessive given that it is lower than HDFC is just one out of five key metrics, says Espirito Santo Securities 

 
LIC housing Finance (LICHF) has underperformed the Bankex over the last six months, given the switch out of defensives and also the consistent decline in NIM (Net Interest Margin) as LICHF has struggled to increase its builder loan book. However, Espirito Santo Securities expects NIMs to slowly expand by 40bps over the next four quarters with no negative impact on credit quality. It believes that LICHF will be a consistent performer with 20% loan book CAGR (compounded annual growth rate) and 20% stable state ROE (Return on Equity). 
 
“We value LICHF on an excess return on equity method and increase our valuation from Rs280 to Rs308, mainly as a result of rollover from FY13E to FY14E, implying 23% upside from the current levels. This implies a 1.9 times FY14E P/B multiple. Currently the stock trades at a more than 50% discount to HDFC core book value which we think is excessive given a higher growth rate and in our opinion more defensive book,” said Espirito Santo in a research note.
 
HDFC is considered to be the benchmark in the housing finance sector given the consistency of earnings and sustainable growth rate; hence the brokerage has compared LICHF with HDFC on five key metrics (consistency, transparency, brand name and customer service, distribution and quality of book). Despite the valuation discount, LICHF rates consistently lower than HDFC on only one of these metrics.
 
“HDFC’s ROA and ROE have been more consistent than LICHF’s, but the book value growth rate is more consistent and higher on an organic basis for LICHF; we would rate LICHF’s disclosure standards as better than HDFC’s; LIC’s agency base is one of the most potent and efficient distribution forces in India and LICHF has one of the most efficient operations with its opex/AUM (operating expenses to assets under management) ratio now below HDFC’s. It might not be HDFC, but in our view LICHF is a very strong housing finance company,” Espirito Santo said.
 
Consistency is observed in return on equity (ROE) and return on assets (ROA) over the years, and LICHF has performed well in comparison with HDFC and Dewan Housing. LICHF has significantly improved the quality of its loan book as well as systems and controls over the last five years leading to consistently declining NPLs (non-performing loans), which are now at par with HDFC at 0.42%. LICHF has consistently delivered loan book growth in excess of 20% over the last five years, and better than HDFC. The graphs below are indicative of how LICHF fares on the consistency metric.
 
 
Transparency in LICHF has improved in recent times. The company’s disclosure levels are rated as the best in the industry, with all the income and expenditure passing through the P&L, compared with the peer group which charges some provisions directly to the Balance Sheet. Also, quarterly disclosure levels are industry leading.
The company has now entirely put the shock of its previous CEO’s arrest in December 2010 ‘bribe for loan’ behind it, and handled the issue in a mature manner. Overall transparency and behaviour towards minority shareholders are considered to be good.
 
LICHF has a strong distribution network with a presence in more than 450 locations across India with around 210 offices across the country. More than 60% of the loans are originated through home loan agents (agents of parent life insurance company, LIC). As the largest life insurance company in India LIC has more than 1.3m agents and hence offers great potential growth opportunities at very low cost to LICHF. LICHF has hired less than 10,000 agents of LIC as of March 2012. Moreover, this is a tied agency for LIC, with relationships spanning more than a decade in the majority of cases and hence likely to be loyal and know the profile of customer’s better than any other channel.
 
HDFC originates bulk of the loans through HDFC Sales Pvt. Ltd (wholly owned subsidiary) and HDFC Bank. Both of these distribution networks have worked superbly well for HDFC. But LICHF’s distribution is equally strong and efficient, concludes Espirito Santo Securities.
 
“The only flaw which we can see in LICHF is that it is akin to a PSU given LIC ownership, and hence there could be negative perception amongst investors about quality of management. Hence, we expect the stock to continue to trade at a discount. However over time, this discount is likely to shrink as investors become convinced about the quality of the franchise.”
 
“Other than the macro factors that concern the entire housing finance sector, our investment case on LICHF mainly depends on an increase in NIM from hereon given conversion of teaser rate loans into floating rate loans. However, there is a risk -- if there is no NIM expansion, due to an increase in the cost of funds, or if the teaser rate loans start getting prepaid,” points out Espirito Santo Securities in its risk analysis.
 
The brokerage points out that “given the LIC (Life Insurance Corporation of India) name attached with LICHF (LIC Housing Finance), the brand is clearly strong, as is the credit rating, meaning a consistently low cost of funds and a high level of customer trust. Channel checks suggest that service levels are superior to PSU (public sector undertakings) banks. The company’s agents provide a doorstep service to the borrower. The processing time is longer than private HFCs (housing finance companies) but much better than PSU banks. However, on this metric it is inferior to the peer group as well as some of the private sector banks.”

 

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COMMENTS

Rajeev Kapur

4 years ago

The big difference is the quality of management and trust. HDFC scores over LICHFL easily. Govt interference, track record of investing in PSU issues to bail them out, rampant corruption with its head going to jail are responsible for the low market valuation of LICHFL. The author is naive to suggest that it deserves valuation equal to HDFC.

Nilesh KAMERKAR

4 years ago

While HDFC may be way ahead as a company; as an investment LICHF may be more profitable from current levels. . . A good company and a good investment can be two different things.

Shekhar

4 years ago

Seems the author(s) is being paid to whip up emotions to prop up LIC HsgFin price

R Balakrishnan

4 years ago

Amusing comparison. Chalk and cheese. Two ends of quality and management. Very odious comparison trying to justify a ten percent price target revision.

REPLY

Rajeev Kapur

In Reply to R Balakrishnan 4 years ago

I agree with R Balakrishnan.

Capital guzzlers

Can worst stocks ever come back? Yes, they can, with sound governance of companies

 
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