LIC Housing: Equity infusion would be preferred over debt capital

Analysts at ICICI Securities note that low capital adequacy and high leverage mean the balance sheet is vulnerable to stress and equity infusion is imminent
LIC Housing Finance on Wednesday revealed that it would raise about Rs 50,500 crore of bonds that would be classified as tier-2 capital instruments. Unlike equity, bonds carry a fixed repayment obligation, and hence, it is imperative that the money is deployed towards expanding loan assets so it provides returns.

Considering LIC Housing’s loan growth of 6 per cent year-on-year (YoY) in the June quarter (Q1), which significantly lagged market leader HDFC’s 11 per cent YoY growth, loan book expansion could remain choppy till there is an overall revival in the housing sector.
Also, raising bonds doesn’t help take care of asset quality issues. Wholesale or developer loan book is 7 per cent of LIC Housing’s total book, but 77 per cent of this segment is under moratorium. Gross non-performing asset (NPA) ratio of this segment was 17 per cent in Q1, though the overall gross NPA ratio stood at 2.83 per cent — similar to March levels, but up 85 basis points (bps) YoY. Analysts at Elara Capital say that while most wholesale financiers have created a Covid-buffer of 0.8-4.3 per cent of book under moratorium, LIC Housing has not provided additionally for this stress, as it is comfortable with its loan-to-value position.

 

 
Overall, 25 per cent of its book was under moratorium till August 31. Individual loans, which account for 93 per cent of the total book, saw 16 per cent of the customers opt for the benefit. Interestingly, 37 per cent of loan against property came under moratorium, of which 21 per cent, falling in the salaried class, chose to defer outgo. Being the second largest housing financier catering largely to employed borrowers, LIC Housing’s moratorium book is a good indicator of the systemic stress.
Under such circumstances, creating a buffer and subsequently writing off bad loans would best ensure that stress isn’t accumulated and the balance sheet reveals the true picture. This, though, would require copious tier-1 equity capital. At 12 per cent, LIC Housing’s tier-1 capital is the weakest among non-banking lenders.

Analysts at ICICI Securities note that low capital adequacy and high leverage mean the balance sheet is vulnerable to stress and equity infusion is imminent. Those at Edelweiss, however, say the management has ruled out equity infusion in the near future. While LIC’s (the parent company) scale and size lends comfort, it is important to get in more equity capital for LIC Housing to remain ahead of the curve in tapping demand recovery and cleansing its financials.
Therefore, while valuations (0.7x FY21 estimated book) might be appealing, the unstable asset quality could be a dampener.



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