Indiabulls Housing Finance: Banking licence key after June quarter blip

Gross NPA ratio slips to 1.47%, worst in five years; incremental cost of funds escalate to 9.2%

Having weathered the liquidity crisis well till a quarter ago, expectations were high from India’s third largest housing financier – Indiabulls Housing Finance (Indiabulls). June quarter (Q1) though was a let-down. Headline growth numbers such a net interest income (NII) and net profit came at Rs 1,475 crore and Rs 802 crore, significantly trailing expectations. These numbers were lower than the year ago levels by 12.7 per cent and 24 per cent, respectively.

Q1 numbers also point to two important factors–weakening asset quality and higher cost of funds. With both being the key ingredients to loan growth, even the latter took a beating. While the top two players – HDFC and LIC Housing posted decent loan growth, Indiabulls’ loan outstanding fell by 10 per cent year-on-year to Rs 1.13 trillion crore in Q1. Disbursements fell by over 25 per cent year-on-year to Rs 7,300 crore in Q1, even lower than March quarter’s Rs 7,500 crore figure. With the housing financier faltering on three important parameters, it highlights the need for a smooth progress on its proposed merger with Lakshmi Vilas Bank (LVB).

Moreover, weak loan growth marred the sub-one per cent gross non-performing assets (NPA) ratio Indiabulls has maintained for over five years. Gross NPA ratio increased to 1.47 per cent from 0.8 per cent in the year ago period and 0.86 per cent in March 2019 quarter. Net NPA ratio was also elevated at 1.1 per cent, a jump of about 70 basis points (bps) year-on-year and 40 bps sequentially. To aggravate things, cost of funds rose by 100 bps year-on-year to 8.91 per cent in Q1, while incremental cost of funds came higher at 9.21 per cent. Even if costs have bottomed out on an overall basis, money is still selectively flowing for the sector. Unlike some peers, Indiabulls hasn’t seen a rating downgrade and that should support its funding initiatives. It would also increase its appeal in loan securitisation– share of which increased from 10.3 per cent last year to 23.7 per cent in Q1, making it an important source of funds. The same also partly explains for a dip in loan book.

Under these circumstances, it accentuates Indiabulls’ need for banking partnership through the LVB merger. While LVB in itself isn’t a healthy franchise, Siddhart Purohit of SMC Capital says that the merger is essential to broad base the loan offering and arrest the shrinkage of loan book. Indiabulls’ deputy managing director Ashwini Kumar Hooda says the company is now more focused on liquidity and less on growth.

Investors, therefore, may stay prefer to stay on the side-line while keeping an eye on the regulatory clearances.