The LIC Housing Finance Ltd stock hit a record Rs679.80 on Tuesday, up nearly 3.5% intraday ahead of its March quarter earnings announcement. This rally was fuelled by anticipation of decent fourth quarter results and it turned out to be so on most parameters.
Reduction in cost of funds and a change in loan mix aided net interest margins (NIMs). NIMs improved to 2.97%— the highest since March 2012. Some brokerage firms expect margin growth to sustain, despite sharp cuts in home loan rates, as the company is poised to benefit from a reduction in bond market yields.
“The company borrows heavily from the markets (80-85% of total borrowings are via NCD/CPs). Continued and gradual refinance of maturing NCDs over next few quarters will help reduce cost of funds further," Motilal Oswal Securities Ltd said in a report. NCDs are non-convertible debentures and CPs are commercial papers.
Net interest income was robust driven by double-digit loan book growth, up 15.5% year-on-year. Disbursements grew at a similar rate boosted largely by non-core segments’ disbursements, while that of the core individual segment, i.e., retail home loans, remained sluggish.
The non-core segment comprises higher interest- yielding retail LAP (loan against property) and developer loans. The company increased exposure to these segments in fiscal year 2017 compared to a year earlier. Developer loans witnessed healthy traction during the quarter owing to a robust pipeline and low base, the management said in a post-earnings conference call, adding that it will be selective and cautious with this segment.
Though asset quality was stable as both gross non-performing assets (NPAs) and net NPAs reduced, provisions swelled significantly; in fact, it almost doubled from a year earlier.
The spike in provisions was due to two factors. The company’s management said that close to Rs50 crore was provided for an account which was NPA for three years and another Rs40 crore was done on payments of arrears to staff. Salary revisions and payment of arrears also took a toll on the operating expenses.
The key factor that has to be monitored is revival of the retail home loan business, which has a lion’s share in the company’s loan book, say analysts. As on March 2017, 83.6% of its loan book comprises retail home loans, lower than the 86.2% exposure it had in the previous fiscal year.
Meanwhile, LIC Housing Finance has launched new products in affordable housing but given the competitive intensity, a further upside in the stock would depend on how soon retail home loan growth picks up.