Photo: LIC Housing twitter handle
LIC Housing Finance has missed the Street expectation by a reasonable margin in two successive quarters. The December quarter (Q3) results were more disappointing, with its net interest income (NII) dropping by about two per cent year-on-year to Rs 9 billion. It led to another quarter of pronounced margin compression. However, the successive quarters of disappointment are well captured in LIC Housing’s stock price, which has corrected by about 30 per cent from its 52-week high of Rs 794 recorded in June 2017.
But is the downside now protected? Analysts at Nomura who maintain their buy rating on LIC Housing believe so. “We think valuations are factoring in both spread and growth pressures. A large part of the de-rating is done and valuations bottomed out when spreads compressed by more than 100 basis points,” they say. Going by the Q3 numbers, there are two key factors which support Nomura’s confidence.
First, LIC Housing kept pace with its 15 per cent loan growth yet again in Q3. Encouragingly, much of it was driven by the core mortgages or retail loan segments, which grew by 11 per cent year-on-year, as against the sub-10 per cent growth seen in 6-7 quarters. The improving traction in retail loans kept a lid on the problematic builder book or developer loans segment, with its share restricted to sub-4 per cent per cent in Q3, a tad lower than the 4-5 per cent levels seen in the past quarters.
Another comforting factor is the bottoming out of home loan rates. Axis Bank’s recent move to marginally hike its lending rate suggests that the cycle of declining lending rates for the industry is nearing its end. Therefore, if LIC Housing sustains the trend of improved disbursements to the retail segment (predominantly salary-class borrowers), that should cushion net interest margin (NIM) going forward. In fact, with profitability plunging from around three per cent last year (when the cost of funds was at its lowest) to 2.33 per cent in Q3, as the trend reverses, analysts at Edelweiss expect NIMs to even out at 2.4-2.5 per cent in FY19-FY20.
Yet, all this is based on the underlying assumption that the asset quality, which has worsened over the quarters, thanks to a higher share of trouble from developer loans, would moderate in the coming quarters. The company’s gross non-performing assets (NPA) almost doubled from Rs 800 million a year ago to Rs 1.4 billion in Q3. The gross NPA ratio also jumped from 0.6 per cent last year to 0.9 per cent in Q3. The NPA levels in Q3 are near about those seen four years ago. Analysts at Kotak Institutional Equities, though, believe that asset quality should improve going ahead, as concerns around the Real Estate Regulation Act and goods and services tax (GST) wear away. “We forecast the gross NPA ratio to remain at 0.4-0.7 per cent in the medium term,” they say.
This is why, with expectations remaining favourable for LIC Housing, most analysts choose to stay optimistic on the stock. But, the financier has to deliver the goods in March quarter for this optimism to continue.