LIC Housing Finance – An Opportunity Player

LIC Housing Finance Ltd (LIC), incorporated in 1989, is the one of the largest mortgage finance companies in India. It provides loans for homes, construction activities and corporate housing schemes. Individual loans constitute 83 per cent of the overall loan portfolio. The company has loan outstanding of Rs 147 thousand crore as of June 2017. LIC India is its majority shareholder with 40 per cent equity holding.

The company possesses one of the industry's most extensive marketing network in India: nine regional offices, 22 back offices and 249 marketing offices covering over 450 locations. In addition the company has appointed over 11,452 intermediaries to extend its marketing reach. The back offices are spread across the country and conduct the credit appraisal and administrative functions. LICHF has set up a representative office in Dubai and Kuwait to cater to the non-resident Indians in the Gulf countries covering Bahrain, Dubai, Kuwait, Qatar and Saudi Arabia.

For the quarter ended in June 2017, LICHF’s profit after tax increased up by 15 per cent on year to year basis at Rs 470 crore, which was lower than estimate on slower revenue traction. The core growth momentum is moderating; nonetheless the current model is likely to ensure steady earnings growth of 15 per cent over the expected 2017-19 period, delivering 18 per cent RoE.

The management has given its guidance of expecting the growth next year to be in the range of 15 to 17 per cent. The growth during the fiscal year 2017 was driven by southern, western and eastern regions of the country and the share of business from non‐metro locations has increased to 55 per cent.

The management alluded to maintain the proportion of LAP and developer loans at 16 per cent levels. Of the total disbursements- retail comprised of Rs 9,500 crore and LAP consisted of Rs 4,500 crore, during the last quarter of 2017. The total debt of the lender as in the fourth quarter of 2017, stood at Rs 126 thousand crore with net worth of Rs 11 thousand crore.

Negative surprise in NIMs

After the strong performance in fiscal 2017, the key disappointment in the first quarter was the negative surprise in net interest margins (NIMs). The net interest margin declined by 74 basis points (bps) on quarter on quarter to 2.5 per cent with lower lending yields and the funding cost was sticky. While a lower number for first quarter of 2018 was imminent owing to seasonality, the dip was higher than estimated.

The lower lending yields was a reflection of repricing pressure; and reversal of interest income - two corporate accounts of Rs 120 crore have slipped into non-performing loans (NPLs). Incrementally, liability repricing and tilt towards higher yielding products such as loan against property (LAP), lease rental discounting (LRD) and projects, which comprises of more than 16 per cent of loan book, will support NIMs. However, repricing pressure is likely to persist given the higher competition in operating segment, which will restrict NIMs. For the fiscal period 2018-19, NIMs are expected to be of 2.6‐2.8 per cent.

Retail disbursements improve; restricted loan growth

Given the massive thrust by the government and regulatory on affordable housing and the Pradhan Mantri Awas Yojana (PMAY) Credit Linked Subsidy Scheme (CLSS), the LIC housing lender has sanctioned 2600 cases under the CLSS. The core individual retail disbursement growth has improved and up by 17 per cent on year on year (YoY) benefitting from the push and preemption of the GST and Real Estate Regulation and Development Act (RERA) impact.

Although the individual disbursements gained traction, however, elevated repayments trend has restricted loan growth to 14.4 per cent YoY. The non‐core loan grew more than 49 per cent YoY, which supported the overall loan growth. The core loan growth will be monitored and the overall growth is estimated to be within the 15 to 17 per cent range over 2017‐19.

GNPLs rise following slippages of 2 non‐individual accounts

The headline gross non-performing loans (GNPLS) rose to 0.72 per cent as against 0.43 per cent in fiscal 2017.  Individual GNPLs have also increased to 0.42 per cent, which is a seasonal trend and the non‐individual GNPLs have jumped to 8.41 per cent versus 6.33 per cent in 2017, this is in account of two non-individual of Rs 120 crore have slipped into non-performing loans.

LIC Housing Finance (LIC), being a leading housing financier, is envisioned to be key beneficiary of the optimistic stance on the mortgage finance sector given the emerging opportunities and government’s thrust on affordable housing and Housing For All initiatives. Though the core individual mortgage segment’s profitability is softer, superior profitability of non‐individual segment is likely to cushion overall profitability impact. The controlled operating expenses have supported profitability.

In addition to, the asset quality risks are limited in the mortgage segment, especially for LICHF, where LAP is also tilted in favour of salaried segment. Despite the short‐ term revenue headwinds, LICHF continues to remain an 18 per cent plus return on equity (RoE) model with limited asset quality risk. The key metric for the housing major is the recovery from the existing delinquent corporate loans and the huge opportunity in the mortgage segment will help LICHF sustain its momentum. The stock trades at 2.5 times the expected 2019 P/ABV.

Risks

LIC Housing finance’s corporate developer segment is under stress given the tough macro environment. In the individual loans division, disbursements are losing traction. Another risk for LICHF is the net interest margins will be under pressure if the company is unable to pass on the pressure of the increased funding cost.

neha.seth@outlookindia.com