LIC Housing Finance Ltd’s September quarter profit more than doubled from a year ago to Rs.243 crore. But it fell well short of Bloomberg consensus estimates of Rs.260 crore. Secondly, profit was depressed in the September 2011 quarter, having declined 60% from the year earlier. At that time, the company had to set aside Rs.205 crore as a one-time provision, as required by a National Housing Bank directive on standard assets.
Sure, asset quality of the financier continues to be robust. Gross non-performing assets as a proportion of its loan book decreased to 0.6% at the end of September from 0.71% a quarter ago.
However, if one leaves out provisioning from the reckoning, operating profit actually shows a 3% decline from a year ago. There are a couple of reasons for this. For one, the overall loan disbursement has slowed. LIC Housing Finance’s overall disbursements grew only 13.4% from a year ago in the September quarter, compared with 35% in June quarter and 22% in March quarter. This was mainly owing to the 70.6% decline in disbursements to developers. Even the rate of disbursements to individuals dropped from 29% in the June quarter to 21% in September.
The declining proportion of developer loans also hit margins as these advances typically have higher yields. LIC Housing Finance’s net interest margin stood at 2.1% for the September quarter, a decline of 8 basis points from June. As a result, net interest income grew only 6% from a year ago. One basis point is one-hundredth of a percentage point.
The decline in net interest margin over the past six quarters is one of the key reasons why the stock continues to underperform the broader market. The outlook for margins continues to be a function of various factors. On the one hand, wholesale funding costs have declined and the company is planning to raise Rs.1,150 crore through a public issue. But yields are likely to be tight, given the increasing competition from banks in the mortgages market, one of the few to see decent growth in these sluggish times. Secondly, recent rule changes in this sector, such as uniform rates for all borrowers and removal of prepayment charges, will put further pressure on margins.