LIC Housing: Change in loan mix, but not alarming yet

Net interest margin at 2.97% best in at least 4 years

Maharashtra opting for real estate regulation Act from Monday (May 1) has further pushed realty stocks. In addition to recent rally, housing finance companies (HFCs)  HDFC, Indiabulls Housing Finance, and Dewan Housing Finance gained around 2.8 to 4.6 per cent on Tuesday, with LIC Housing Finance coming out tops, closing 5.5 per cent higher at Rs 705. Most HFCs are at or near their all-time highs. Analysts say LIC Housing is best placed to benefit from reforms such as Rera. But, the salaried class’s share in LIC Housing’s loan pie has shrunk a bit in March quarter (Q4). The segment’s share has been falling gradually from 97 per cent in Q4FY14 to 86.2 per cent in Q4FY16 to 83.6 per cent per cent in Q4FY17. On the other hand, loans against properties (LAPs) and developer loans grew 92 per cent year over year to Rs 1,232 crore in Q4. Low base possibly explains high growth, but any dramatic change in loan mix, especially for an HFC known to offer stable growth, may not be seen as positive. So, a further decline in share of salaried class segment may heighten risk related to stock. LAP and developer loans usually run a higher risk than the salaried segment, but clock higher profit margins. The good part is, project loans, despite breaking into a gallop, still account for only 16.4 per of the loan pie.
 
In Q4, a higher proportion of project loans boosted LIC Housing’s net interest margin (NIM) from 2.71 per cent a year ago to 2.97 per cent, the best in at least last four years. More money from bonds and public deposits reduced weighted average cost of funds from 9.14 per cent a year ago to 8.59 per cent in Q4, helping expand NIM. Analysts say NIM is sustainable, given the stable outlook for Indian bond market.
 
Show in Q4 was largely in line with expectations, as net interest income grew 27 per cent to Rs 1,040 crore and net profit rose 18 per cent to Rs 529 crore from a year ago.
 
Also, despite increase in exposure to project loans, overall loan quality hasn’t come under stress. Non-performing loans (NPLs) at Rs 627 crore were higher 10 per cent from a year ago, in step with loan disbursements, also up 10 per cent to Rs 17,178 crore. NPL ratios at 0.43 per cent and 0.14 per cent (adjusted for loan-loss provisions) are at a three-year low, within the comfort zone of analysts.
 
This is why analysts largely remain positive on LIC Housing, despite a shift under way in its loan mix. At 2.6 times the company’s FY18 book value, the stock continues to offer value.