LIC Housing Finance: Firing on all cylinders

The lender may continue to see robust growth, but maintaining profitability will be challenging in a rising interest rate scenario.

The September quarter results of LIC Housing Finance (LICHF) were in line with analysts’ robust growth expectations. The lender reported a 63 per cent year-on-year jump in net interest income to Rs 305 crore. This was helped by robust demand for housing loans (loan book up 36 per cent) and a 49-basis-point (bps) improvement in net interest margins (NIMs) at 2.93 per cent.

Two factors – higher operating expenses and a rise in tax provisions – restricted growth in operating profit (up 58 per cent to Rs 319.1 crore) and net profit (up 37 per cent at Rs 234 crore). The company’s asset quality improved substantially, courtesy economic growth. Gross non-performing assets fell 60 basis points year-on-year to 0.7 per cent.

The strong traction in loan book continued to be supported by a 47 per cent jump in sanctions and a 37 per cent rise in disbursements in the half year-ended September. However, the outlook on future profitability looks challenging due to rising interest rates, high property prices and increasing competition. The company will keep renewing its recently-introduced scheme, ‘Advantage 5’ (interest rate is fixed at 9.25 per cent for five years), depending on the trend of borrowing costs.

The management is hopeful of maintaining NIMs, as 65 per cent of its loan book is floating while 58 per cent of its liabilities are fixed. LICHF recently raised its prime lending rate by 50 basis points, which will help manage the rise in interest costs. However, analysts expect margins to trend downwards over the next two years amid its high growth strategy and competition.

The stock has gained almost 83 per cent in the last one year and trades at 2.8 times its 2011-12 adjusted book value, much higher than the analysts’ target multiple of about 2.2-2.4 times.