LIC Housing: Rising share of non-retail loans perceived to be riskier

In the December quarter (Q3), which was extremely painstaking for non-banking financial companies (NBFCs), LIC Housing was relatively better off. Known as a steady player not boasting of astronomical growth rates, it has maintained its loan growth at 15-18 per cent over the last three years. 

This is why the 16 per cent year-on-year (YoY) growth in loan assets during the quarter was viewed positively by the Street. This, consequently, led to an 18 per cent YoY increase (Rs 1,042 crore) in net interest income (adjusted for net loss on modification of loans from fixed to variable pricing), and 26 per cent growth in net profit (Rs 596 crore).

However, there are some concerns, especially on loan book composition. Going by the loan disbursement numbers, Q3 saw much of its growth coming from non-retail loans (28 per cent YoY), which comprise loan against property and to projects (developers). These are perceived to be riskier. 

 
Individual loans (77 per cent of overall) grew only 4 per cent YoY. Share of non-retail loans, thus, stands at 23 per cent of the loan book, compared to 17 per cent a year-ago. The silver lining is that on a sequential basis, non-retail loan disbursements declined by 11 per cent, while retail grew 2 per cent.

LIC Housing improved its asset quality metric on builder loans, with the gross non-performing assets (NPA) ratio for the segment at 6.2 per cent, as against 10.6 per cent a year-ago. Gross NPAs among retail loans rose from 0.4 per cent to almost 1 per cent.

“The steady rise in individual gross NPAs is disconcerting and needs to be closely monitored,” says HDFC Securities. Overall, gross and net NPAs for Q3 came at 1.26 per cent and 0.85 per cent, respectively — an increase of 30-40 basis points year-on-year (up 6-31 bps sequentially).

A key positive was that profitability didn't take a hit in Q3. Higher contribution of developer loans, which are more profitable, helped the firm. Analysts believe net interest margins (NIM) have bottomed out and could increase by 30–60 bps over the next two to four quarters, from the current 2.3 per cent in Q3, on the back of loan book re-pricing in favour of floating interest rates. 

Despite attractive stock valuations (1.4x its FY20 book), any slippage in asset quality or profitability — especially on account of builder book exposure — will not be taken kindly by the Street.


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