LIC Housing Finance Q1: Rise in non-performing assets a cause for concern

Bad loans or gross non-performing assets (NPA) as a percentage of gross advances rose to 1.21% in Q1 from 0.72% a year back and 0.78% as of March 2018

LIC Housing Finance continued to face margin pressures even in the June-2018 quarter (Q1) amid high cost of funds and inability of the company to pass the additional cost to end consumers due to stiff competition. 

The company’s net interest margin or NIM contracted by 18 basis points to 2.34 per cent. Bond market pressure during the quarter pushed up the company’s finance costs by 12 per cent year-on-year. 

The company’s major chunk of borrowings is in the form of non-convertible debentures (NCDs), comprising 79 per cent of borrowings in Q4FY18. 

Thus, NII (a difference between interest earned and expenses) went up just seven per cent.

Despite this, operating profit grew by 11 per cent year-on-year to Rs 9.5 billion, thanks to lower operating expenses. The company’s cost-to-income ratio – operating expenses other than finance costs and provisions as a percentage of total income (NII and other income) –  contracted sharply by 217 basis points year-on-year to 7.5 per cent.

However, the company’s asset quality deteriorated during the quarter. Bad loans or gross non-performing assets (NPA) as a percentage of gross advances rose to 1.21 per cent in Q1 from 0.72 per cent a year back and 0.78 per cent as of March 2018. Despite this, the company’s provisions and loan losses plunged by 21 per cent year-on-year.

A fall in provisioning despite a rise in gross NPAs is mainly due to expected loss mechanism under new accounting standards or IND-AS. Loss from defaults was expected to be lower in Q1 as was the case in other housing finance companies. However, increase in gross NPAs is worrisome as it indicates probable rise in credit cost in the future quarters,” said Deepak Kumar, analyst at Narnolia Financial Advisors, who also believes loan growth of the company has remained stagnant around 15 per cent from past many quarters.

In the above backdrop, the stock, which rose six per cent over the last month, is expected to see some pressure in Monday’s trading session.