Stocks of LIC Housing
(LICHF) and PNB Housing (PNBHF) have corrected 17-23 per cent in the past three months. Despite better-than-expected September quarter (Q2) results partially lifting their stocks, they haven’t been adequate to make up for lost ground.
The problem with LICHF is its 7 per cent exposure to wholesale loans, in comparison to peers including PNBHF (which has 39 per cent exposure to non-retail loans), LICHF’s share doesn’t appear too high, these loans have marred the housing financier’s asset quality. In Q2, the gross non-performing assets (NPA) ratio remained elevated at 2.38 per cent (versus 1.27 per cent last year and 1.98 per cent in the previous quarter) and marks over four quarters of continued increase in NPA ratios.
The problem for PNBHF is a little different. While its 39 per cent exposure to construction loans, loan against property (LAP), and corporate term loans have always been a point of discomfort to investors, the current environment is prompting them to be more cautious on PNBHF’s exposure to these loans. That said, PNBHF’s asset quality has held up well with the gross NPA ratio. Even after nearly doubling from March 2019 levels, it was less than one per cent in Q2.
The other concern is its funding mix. The mortgage lender has raised $175 million of external commercial borrowings and plans to raise Rs 10,000 crore worth non-convertible debentures, indicating that measures to correct the asset-liability mismatch are underway. While doing so, PNBHF hasn’t lost track of profitability, with net interest margin (NIM) expanding by 50 basis points (bps) year-on-year (YoY) to 3.2 per cent in Q2. While the loan book may have shrunk, the share of retail mortgages has risen to 62 per cent from 59 per cent a year-ago. Same is the case with LICHF, which saw a 38–40 per cent YoY fall in loans disbursed to wholesale and LAP segments in Q2, while its retail loans grew at 16 per cent YoY, indicating LICHF’s ability to penetrate well in the affordable housing space. Even if these loans aren’t a material part of the overall loan portfolio yet, the space is growing ahead of others, keeping LICHF’s core home loan growth rate buoyant. That it is able to maintain the NIM at 2.3 per cent indicates that profitability isn't being compromised for growth in the affordable housing segment. Analysts at Jefferies note that even if the mix shift toward home loans should weigh on blended yields, falling funding costs should cushion the impact on the NIM.
While concerns around both housing financiers are good enough, steps are being taken to allay these fears, which the Street seems to be ignoring. With valuations at 1.2x FY21 estimated book, both stocks are positioned attractively.