LIC Housing Finance's non-retail loans may throw up negative surprises

Asset quality worst in four years, though loan growth steadies the ship

As Murphy’s Law goes, whatever can go wrong will go wrong. This played out in the case of LIC Housing Finance (LIC HFL). Despite the developer loan book not being too material, the housing finance company’s asset quality touched a near-four-year low, with gross non-performing asset (NPA) ratio at 1.98 per cent in the April-June quarter (first quarter, or Q1).

Much of the pain has emanated from its non-retail loans — the share of which stood at 24 per cent in Q1. While at these levels, the share of wholesale loans is similar to that of its peers — HDFC and Indiabulls Housing — the share of developer loans at 7 per cent is the least among peers. Yet when there is systemic stress, it spares no one. The question is whether the wholesale book at Rs 47,068 crore is vulnerable to further stress.

Gross NPA ratio has been steadily increasing since 2017-18, thanks to this segment. Analysts at Emkay Global Financial Services say they expect the surge in credit costs to stay for the next 6-8 quarters, considering the current turmoil in the developer segment.

But whether LIC HFL’s wholesale portfolio poses a larger risk is something that may play out over the next 3–6 quarters. The positive factor is that the financier is exercising caution over wholesale loans, a factor that was evident in Q1, as the share of this segment was contained at 7 per cent of the total loan book. The overall disbursement in Q1 grew by 7 per cent year-on-year, with the share of retail loans accounting for 93 per cent of disbursements — up from 89 per cent in the March quarter.

The other positive factor is that stability seems to be setting in in terms of the cost of funds. While Q1’s average cost of funds came at 8.46 per cent, incremental costs were seen at 8.24 per cent. With the overall funding mix not having changed much in a year, the moderating cost conditions should support profitability in the coming quarters. This was partly seen in Q1, with net interest margin settling at 2.35 per cent — the same as the year-ago levels.

Yet, while these positives should support the LIC HFL stock in the medium- to long-term, the near-term worry will be on its asset quality. A noticeable deterioration is already reflecting in its valuations, which are down by 15 per cent, with current valuations at 1.2x its 2019-20 book value. “LIC HFL is expected to report healthy performance. But the impact in terms of slower growth and marginal asset quality pain cannot be ruled out,” point out analysts at ICICI Securities.