LIC Housing Finance is taking on more risk but benefits not in sight1 min read . Updated: 27 Aug 2018, 08:26 AM IST
While there is indeed no worry on the asset quality of LIC Housing Finance, rising share of loans against property has implications for future asset quality
At first glance, LIC Housing Finance Ltd’s Q1 results may look just right to justify the 17% climb of its stock over the past two months. The housing finance arm of the country’s largest insurer reported a healthy 18% growth in net profit on the back of a 15% growth in its loan book. The loan book expansion is similar to its historic trend and comes from the less risky individual book.
But the home loan lender has access to a massive network of agents of its parent. Indeed, 65% of its loan origination is from this agent network. Therefore, consistent strong loan growth is all but a given.
A detailed study of the performance, however, reveals several problem areas. Firstly, disbursal growth is largely due to a sharp jump in margin friendly developer loans and loans against property (LAP). The share of LAP has gone up to 16% from 12.9% a year ago.
But the margins have not improved. LIC Housing Finance’s net interest margin shrank to 2.34% from 2.52% a year ago. Spreads also narrowed to 1.9% from 2.08%.
The lender is not seeing the benefits of growing a riskier part of its loan book yet. Developer loans and LAP tend to have a higher bad loan ratio simply because of their risky nature.
While there is indeed no worry on the asset quality of LIC Housing Finance (its individual loan book is still 70% of total loans), rising share of LAP has implications for future asset quality.
For the June quarter, the lender saw its asset quality metrics hold steady with just a mild increase in ratios.
LIC Housing Finance has delivered consistently over growth but its June quarter numbers have been a mixed bag. The pressure of competition is also showing.
Despite the sharp rise, the LIC Housing Finance stock trades at a modest multiple of 1.74 times its estimated book value for FY20, far cheaper than most of its peers. Perhaps this is testimony to the fact that investors are on the lookout for a far superior performance by the company.