LIC Housing Finance Ltd’s (LIC HFL’s) December quarter earnings threw up a couple of nasty surprises. One, the company’s asset quality deteriorated as loans to three property developers went bad unexpectedly. Second, the company was not able to improve its margins, something which the Street took as a given because of ease in funding costs.
The loans to the three property developers accounted for slippages of Rs.160 crore. As a result, gross non-performing assets for LIC HFL rose to Rs.538 crore at the end of December compared with Rs.414 crore three months earlier.
Because of that, the company had to set aside Rs.315.6 crore as provisions against bad loans compared with a write-back of Rs.796.8 crore a year ago. That hit the net profit, which declined by 22.7% from a year ago.
Without taking provisions into account, operating income for LIC HFL increased by 8.5% from a year ago. The other positive for the company was the 27% increase in loan disbursements. That compares well with the 13.4% growth seen in the September quarter. The push to the loan disbursements comes from a growth in loans to property developers/projects.
In this segment, LIC HFL disbursed loans worth Rs.497 crore compared with Rs.161 crore a year ago and Rs.121 crore in the September quarter. The sequential growth in loan disbursals was the first after eight quarters of decline.
Still, this higher margin segment accounted for only 3.88% of the company’s loans at the end of December compared with 3.85% three months ago. That, plus an interest income reversal of Rs.6 crore had an adverse impact on margins.
Overall yields grew to 10.75% in December, a growth of just 2 basis points from September, which is also partially owing to higher competition. At the same time, cost of funds increased to 9.67% in the third quarter, little changed from the previous quarter. As a result net interest margin remained at 2.1%, the same level as in the September quarter.
Given its cheap valuations of about 1.6 times the estimated FY14 book value, the LIC HFL stock’s performance hinges on margin improvement. According to Edelweiss Securities Ltd, repricing its so-called Fix-O-Floaty loans worth Rs.7,000 crore should help improve margins. However, the deterioration in asset quality, which could lead to a slowdown in the property developer/project segment disbursals, poses a threat.