LIC HF: Loans against property prop up show

However, margins may not sustain amid rising competition and stable bond yields

LIC Housing Finance (HF) reported a good set of results for the December quarter (Q3). Continued traction in its individual loans fuelled healthy loan growth of 15 per cent for the company. LIC HF's loan growth was similar to that in recent quarters. However, the devil lies in the details. LIC HF's loans against property or LAPs (10.4 per cent of loan portfolio) grew sharply on a sequential as well year-on-year basis even as individual loan growth remained a minor fraction of LAP growth. The company clubs these two loan portfolios while reporting numbers and, hence, was able to mask the weakness in its core individual loan book. Notably, LAP segment has grown at a faster clip in recent quarters, with the exception of Q2. The LAP segment was expected to be hit after demonetisation. It seems the individual loan book (excluding LAP) has been hit by demonetisation as it grew only nine per cent, which is the slowest growth over the past seven years for the company. LAP book, on the other hand, grew 88 per cent in Q3.
 
Improvement in asset quality ratios such as gross (total) non-performing assets, both sequentially as well as over a year ago, abates concerns of rising bad loans for now. In fact, LIC HF's net interest margin (NIM) expanded 17 basis points to 2.75 per cent in Q3. Falling yields (thus lower borrowing costs) and higher proportion of fixed-rate loans in a falling interest rate environment are two main factors driving NIM expansion. With banks cutting their rates aggressively and tailwinds from weak yields largely behind LIC HF, the margins appear unsustainable. However, higher fixed-rate loans provide some comfort in a falling interest rate environment. "LIC HF does not have much room left to grow or protect margins through LAP," says Digant Haria, analyst at Antique Stock Broking. Amid rising competition, yields in LAP segment, too, have started trending down in recent months.
 
Despite its near two per cent surge on Monday, the LIC HF stock trades at 2.1 times its FY18 estimated book value. This is at a discount to larger peer HDFC (three times) and Indiabulls Housing Finance (2.4 times). This discount is unlikely to reverse in a rush, given lower return on assets versus peers and rising pressure on earnings growth.