Photo: LIC Housing twitter handle
It is two successive quarters of LIC Housing Finance missing the Street expectation by a reasonable margin. December quarter (Q3) results were more disappointing, with net interest income (NII) dipping by about two per cent year-on-year to Rs 9 billion. It led to another quarter of pronounced margin compression. However, successive quarters of disappointment is 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, say so. “We think valuations are factoring in both spread and growth pressures. A large part of the de-rating is done and valuations have bottomed out when spreads compressed by more than 100 basis points,” they say. Going by 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 loans 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 level in Q3, a tad lower than 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 disbursals to retail segment (predominantly salary-class borrowers), that should cushion net interest margin (NIM). In fact, with profitability plunging from around three per cent last year (when cost of funds was at its lowest) to 2.33 per cent in Q3, as the trend reverses, analysts at Edelweiss expect NIMs to smoothen 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 higher share of trouble from developer loans, would moderate in the coming quarters. Gross non-performing assets (NPA) almost doubled from Rs 0.8 billion a year ago to Rs 1.4 billion in Q3. 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, as concerns around Real Estate Regulation Act and the goods and services tax wear away. “We forecast 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 the March quarter for this optimism to continue.