LIC Housing Finance stock comes under pressure on weak Q2 results

Improvement in interest income and margins crucial for investor sentiment to revive

LIC Housing Finance (LIC HF) reported weak results for the July-September quarter (Q2) of 2022-23.

The second-largest mortgage issuer saw a sharp drop in net interest margin (NIM), which led to a big sequential fall in profit after tax (PAT).

As a result, investors sold down the stock. Credit costs rose due to high write offs, which could, given LIC HF’s significant market share, give rise to wider concern. However, disbursements were better than expected. 

LIC HF reported a PAT of Rs 305 crore, which was up 23 per cent year-on-year (YoY) but down 67 per cent quarter-on-quarter (QoQ), due to higher operational expenses and credit costs of Rs 570 crore.

Net interest income (NII) was flat YoY, and down 28 per cent QoQ, at Rs 1,160 crore. The pre-provision operating profit (PPOP) at Rs 945 crore was flat YoY and down 35 per cent QoQ. 

NIM declined by about 20-basis points (bps) YoY and was down 75 bps QoQ to a thin 1.8 per cent. This was due to a 4 per cent QoQ decline in interest income and an increase in cost of borrowings by about 30 basis points QoQ.

The interest income included a one-off impact of Rs 275 crore due to the repricing of fixed-rate loans to the floating rate.

There was a conversion of Rs 9,000 crore in the home loan pool (mostly corporate employee loans with zero NPAs) to floating rate. This meant rate reduction versus earlier prevailing fixed rate. Approximately 98 per cent of the portfolio is now floating rates, compared to 96 per cent QoQ. 

Also, project/developer loans declined by Rs 720 crore sequentially, which led to a loss of Rs 95 crore in interest income from higher-yielding project loans.

Lending rates were hiked by around 60 bps and another 115 bps of hiking/ repricing is expected in Q3, 2022-23. An improvement in margin and spreads is expected in H2. 

Disbursements in individual home loans were flat YoY but non-housing individual and commercial disbursements grew by 44 per cent. Builder and project loan disbursements grew by 15 per cent YoY. Total disbursements went up 4 per cent YoY. The overall loan book rose by about 10.4 per cent YoY and 2.6 per cent QoQ. Home loans grew by 15 per cent YoY and 3 per cent QoQ. 

Asset quality was stable while gross stage (GS3) loans held at 5 per cent and net stage 3 (NS3) improved by about 20 bps QoQ to 2.8 per cent. The provisioning coverage ratio (PCR) on Stage 3 loans improved marginally to 44 per cent.

Covid-related provisions fell to Rs 540 crore (around 0.2 per cent of AUM). The provisions for assets re-categorised as NPAs, and those classified under Stage 1 and 2 stood at Rs 120 crore. It is down from Rs 150 crore. 

The underlying reasons for the decline in NII and NIM would be critical.

The company is said to be focussed on tier II and III cities and on the affordable segment. The overall loan growth guidance is for 15 per cent across the full financial year. The transmission of higher cost of borrowing through to lending rates will be completed in Q3.

An improvement in one-time restructuring is also expected. The company also expects to go digital to pay off approximately one-third of loans, already being booked through digital channels. 

The stock dropped 9 per cent to Rs 365 after results were declared. Post the weak Q2, earnings downgrades of around 10-15 per cent are likely for the full FY23. Going ahead, investors will be looking for visibility on NIM improvement back to around 240 bps level.