LIC Housing Finance outlook gets stronger

Analysts optimistic on sustained rise in net interest margin

There are three major takeaways from LIC Housing Finance’s September quarter (Q2) results. LIC Housing has further strengthened as a consumer loan company in Q2, as it reduced disbursals to big-ticket projects by nine per cent, while increasing exposure to consumer loan segment by 10 per cent over a year ago to Rs 8,755 crore. Also, the weighted average cost of funds for LIC Housing declined 35 basis points (bps) over a year ago to 8.94 per cent as the share of non-convertible debentures in funds to LIC Housing touched an all-time high of 80 per cent. Dependence on costlier bank borrowings reduced to less than 10 per cent in Q2, resulting in a sharp shrinkage in cost of funds to LIC Housing. This raised the net interest margin (NIM, which is interest income minus interest outgo, divided by interest-earning assets) in Q2. Though yields on loans declined 20 bps over a year ago to 10.67 per cent, cost of funds for LIC Housing declined more, 35 bps, helping expand the NIM by 12 bps over a year ago to 2.68 per cent.

"As bond yields are falling and a few NCDs are due for maturity in two years, cost of funds may ease by 30 bps, helping NIM expand to 2.8 per cent in FY18," says Shweta Daptardar of KRC Research.

  Net interest income, which is interest income minus interest outgo, at Rs 866 crore was up 21 per cent over a year ago but missed Bloomberg estimate of Rs 890 crore. However, NIM at 2.68 per cent was a positive surprise. Analysts at ICICI Securities say the ratio of operating cost to operating income was 14.7 per cent, lower than the estimate of 16 per cent. Provision for loans and write-offs stood at Rs 30.3 crore in Q2 (against Rs 30 crore a year ago). Lower costs as well as provisioning helped net profit expand 20 per cent to Rs 495 crore in Q2, ahead of Bloomberg consensus estimate of Rs 475 crore. Ratio of non-performing assets (NPAs) to total loans was maintained at 0.57 per cent and ratio of 'NPAs minus provisioning' to total loans was 0.28 per cent, a bit lower than a year ago. Total loans for Q2 grew 15 per cent, with loans to individuals or consumers accounting for 97 per cent of the total portfolio.

While the results were good, LIC Housing's stock saw a volatile session on Thursday. Though it touched its all-time and yearly high of Rs 624 during intra-day trade, it closed at Rs 609, down 1.12 per cent from the previous day's close.

An analyst says: "Some investors may have sold the stock given the rally in the past one month'. Over the past four months, the stock is up 43 per cent. Analysts expect further rerating, if the management commentary in analyst call goes positive. The stock now trades at 2.8 times its FY17 net worth.