LIC Housing: Interest margins improve, but asset quality is key

The sharp increase in gross NPAs reflect stress in its loan against property business.

LIC Housing Finance, India’s second largest housing financier, reported its March quarter (Q4) results over the weekend. The numbers met estimates, but LIC Housing stock didn’t have a brisk day at the bourses on Monday. Two key reasons explain the muted show.

Firstly, gross non-performing assets (NPA) ratio saw a swift 75 basis points (bps) increase year-on-year in Q4. Gross NPA in its core individuals lending business nearly doubled from 0.42 per cent last year to 1.14 per cent in Q4. For investors, this is a setback as LIC Housing’s individual loans segment sources 85 per cent of loan from the salaried class, where delinquencies have traditionally been negligible. Therefore, analysts at ICICI Securities attribute the increase in bad loans to its retail loan against property (LAP) business.

Also, even as the home financier was conservative with its developer book disbursements in Q4 – disbursements down 10 per cent year-on-year, the share of developer loans to overall loan book has risen to 6.75 per cent from 6.25 per cent last year. The proportion was less than five per cent about two years ago. Likewise, the share of retail LAP has gone up by 70 (bps) year-on-year to 17.2 per cent in Q4. Overall slowdown in the real estate sector could be detrimental to collections and/or recoveries in LAP and developer loans segments, thus putting further pressure on overall asset quality, going ahead.

The Street, hence, choose to overlook the 10 bps increase in net interest margin of NIM to 2.54 per cent in Q4. Jump in floating rate loan book from 74 per cent last year to 93 per cent in FY19 has supported NIM and has helped counter the spike in average cost of funds from 8.31 per cent a year-ago to 8.49 per cent in Q4. Incremental funds though, are more expensive at 8.53 per cent- about 40 bps higher than FY19’s average cost. Therefore, whether Q4’s NIMs are sustainable and leave room for expansion will be tested in June FY20 quarter.

Investors, hence, shouldn’t be tricked by Q4’s NIM and LIC Housing’s appealing 1.3x FY20 price-to-book valuations. Analysts at Nomura say the recent asset quality trends coupled with expected stress in construction financing mean near-term stock catalysts are lacking are the stock.