A contraction of 48 basis points (bps) year-on-year (y-o-y) in net interest margin (NIM: a difference between interest earned and expanded as per cent of advances) of LIC Housing Finance during the March 2018 quarter (Q4) disappointed investors. NIMs were down largely due to lower yields on loans, induced by stiff competition.
The fall would have been higher but for the 84 per cent y-o-y rise in project/developer loan disbursements, where yields are typically 300 bps higher than individual/retail loans. The surge in developer loans, however, helped overall disbursements grow 14.5 per cent in Q4, offsetting the slower growth of 8.4 per cent in individual loans. Yet, outstanding loan portfolio as of March 2018 was up 15 per cent, below industry trend.
The good part is that NIM is unlikely to contract going ahead, as yields are expected to go up, owing to an upward revision in interest rates in April. According to the management, since major chunk (74 per cent) of LIC Housing is under floating rates, yields would rise with the recent hike. This hike is undertaken considering the existing trend in the market, hence, demand is unlikely to get impacted, it said.
Moreover, a better borrowing mix would also support margin as a re-pricing of some portion (around one-fourth) of the high-cost funds such as non-convertible debentures will bring down the company’s cost of funds. Currently, 79 per cent of total borrowings is accounted by non-convertible debentures.
Analysts expect the downward re-pricing of high-cost liability would reduce cost of funds by 10-30 bps. And, this along with rise in yields will sustain margins at current levels. Moreover, a likely increase in the share of project/developer loans would help prop up margins. The management, during a conference call, indicated with some comfort post-RERA (Real Estate Regulatory Authority), project portfolio would grow faster.
Although high non-performing assets (NPAs) from the project/developer segment weighed on LIC Housing’s overall asset quality (though still not alarming, with gross and net NPA below one per cent) in Q4, its share was only 4.9 per cent up, from 3.8 per cent a year ago.
While analysts don’t expect any asset quality surprises, the margin performance will be a key earnings trigger.