But whether LIC HFL’s wholesale portfolio poses a larger risk is something that may play out over the next 3–6 quarters. The positive factor is that the financier is exercising caution over wholesale loans, a factor that was evident in Q1, as the share of this segment was contained at 7 per cent of the total loan book. The overall disbursement in Q1 grew by 7 per cent year-on-year, with the share of retail loans accounting for 93 per cent of disbursements — up from 89 per cent in the March quarter.
The other positive factor is that stability seems to be setting in in terms of the cost of funds. While Q1’s average cost of funds came at 8.46 per cent, incremental costs were seen at 8.24 per cent. With the overall funding mix not having changed much in a year, the moderating cost conditions should support profitability in the coming quarters. This was partly seen in Q1, with net interest margin settling at 2.35 per cent — the same as the year-ago levels.
Yet, while these positives should support the LIC HFL stock in the medium- to long-term, the near-term worry will be on its asset quality. A noticeable deterioration is already reflecting in its valuations, which are down by 15 per cent, with current valuations at 1.2x its 2019-20 book value. “LIC HFL is expected to report healthy performance. But the impact in terms of slower growth and marginal asset quality pain cannot be ruled out,” point out analysts at ICICI Securities.