The three per cent net interest margin (NIM) posted by LIC Housing Finance in the March quarter perhaps tempted analysts to believe the trend could continue. But, for a home financier whose mainstay is to lend to retail customers, mainly the salaried class, it could be foolhardy to believe so even in a falling interest rate regime. This is why the Street was caught on the wrong foot with respect to LIC Housing. The question is whether the 2.5 per cent NIM in the June quarter (Q1) is really dismal considering the lending rates scenario and whether it justifies the four per cent fall in its stock on Monday.
If compared sequentially or even year-on-year (2.6 per cent NIM in Q1 of FY17), Q1’s NIM is a let-down. But, one should take into account that nearly Rs 87,000 crore of loans (60 per cent of the loan book as of June 30, 2017) have been re-priced to pass on the benefit of lower interest rates to its customers. The move was important to ensure that not more than six per cent of its total customers migrated to competitors to lower their interest burden. Five-six per cent of loan account migration is in line with industry standards.
Also, one needs to acknowledge the rise in the proportion of non-retail loans in the past one year. These loans (loans against property and developer loans), which tend to be more margin-accretive, now account for 16.7 per cent of the total loan book as against 12.2 per cent a year ago. But, with LIC Housing’s management wanting to cap the share of loans against property at 13 per cent and developer loans at five per cent, the room to expand the more profitable businesses is also limited going forward. Investors, though, need to look at the positive side to this decision as the non-retail book tends to be riskier. Gross non-performing assets (NPA) ratio of retail loans stood at 0.4 per cent in Q1, whereas the non-retail book’s figure was 8.4 per cent. Therefore, some rationalisation of loan book growth is good in the long term.
With this, the financier who until FY16 was known for stable growth and clean asset quality, may once again see these aspects making a comeback. Investors, too, should accordingly taper their earnings expectation. “Though core growth momentum is moderating, we believe current model is likely to ensure steady earnings growth of 15 per cent in FY17-19, delivering 18 per cent return on equity,” say analysts at Edelweiss. They expect NIMs at 2.6-2.8 per cent in FY18-19. From this standpoint, Q1’s 11 per cent growth in net interest income (Rs 913 crore) and net profit (Rs 407 crore) growth of 15 per cent don’t appear to be a big miss as perceived by the Street. These levels, if any, may be the new normal for LIC Housing going ahead.
After the seven per cent correction in the past one week, the stock trades at a reasonable 2.9 times of the FY18 estimated book.