Rate cut brightens outlook for LIC Housing Finance

The key question about LIC Housing Finance Ltd in recent times has been on its ability to improve margins. The firm’s net interest margin (NIM) remained flat sequentially at 2.2%. Although when adjusted for ₹ 24 crore interest write back the firm had in the September quarter, margins improved by 6-7 basis points, (one basis point is 0.01%), it didn’t do much to cheer investors. In that context, the 25 bps rate cut by the central bank comes as a shot in the arm for the housing financier.

LIC Housing Finance’s key funding source is the bond market. Non-convertible debentures made 71% of its borrowing at the end of December compared to 58% in 2011. Rising liquidity in recent times has reduced rates in the bond markets already with AAA yields down by as much as 60 basis points over the last three months. That has helped incremental spreads for the company in recent times and improved the near-term outlook.

The lower funding cost benefit comes at a time when loan growth is looking up in this sector. LIC’s loan disbursements growth improved to 25% year-on-year in the December quarter from 21% in the three months ended September. Disbursements in the developer loans jumped by one-half while disbursals in the individual segment also grew at a robust rate of 23% compared with 18% in the September quarter.

The other bugbear of investors—bad loans—is also under control. Gross non-performing assets as a percentage of loan book declined to 0.57% at December-end compared with 0.63% three months earlier.

To be sure, the Reserve Bank’s rate cut will also possibly kick-start a fall in lending rates by banks leading to an across-the-market reduction in loan rates which will dent spreads.

LIC Housing Finance has some protection there—in the form of a higher proportion of fixed-interest loan assets. Pure floating rate products made only one-third of its outstanding loan portfolio at December-end compared with 49% at the end of March 2013, though this excludes some products which have floating rates after an initial period of fixed rates. This will still allow it to improve NIM in the near term. Some analysts have predicted a 40 bps improvement in the next fiscal year.

But margin improvement after that will depend on the “quantum/growth of builder and LAP book,” said Nomura Research. With the firm’s shares also trading at 2.4 times one year forward book value that explains why their price increase on Thursday was just in line with the broader market.

The writer doesn’t own shares in the above-mentioned companies.