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For housing finance providers such as LIC Housing Finance, the road to growth is long. The challenges on growth may weigh on profitability. Signs of this were visible in the September quarter itself
For housing finance providers such as LIC Housing Finance, the road to growth is long. The challenges on growth may weigh on profitability. Signs of this were visible in the September quarter itself

LIC Housing Finance needs a bad loan fix despite recovery in Q2

  • LIC Housing Finance reported a rise in collection efficiencies to 96% of pre-pandemic levels for its loan book out of moratorium
  • Unless the company begins to see meaningful growth, keeping bad loan ratios under control could be difficult

LIC Housing Finance Ltd’s September-quarter performance showed more trouble, but some recovery from the pandemic’s blow.

The company reported a rise in collection efficiencies to 96% of pre-pandemic levels for its loan book out of moratorium. Essentially, borrowers who were able to ride the lockdown without any trouble continued to keep up their repayments after the economy unlocked.

The 25% loan book under moratorium, too, showed decent collections, according to the management. Note that the moratorium ended on 30 August.

The improvement in collection efficiency has given confidence to the lender. LIC Housing Finance’s provisions fell 60% from a year ago, a sign that the lender does not see defaults increasing sharply in the coming quarters. Analysts said this makes it vulnerable to future risks. “We would prefer to closely monitor the moratorium book falling on track, high-ticket developer loan resolution and meaningful improvement in stage 3 asset," wrote analysts at Prabhudas Lilladher Pvt Ltd in a note.

Looming risk
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Looming risk

Riskier developer and project loans form more than 25% of the loan book. What’s more is that the lender’s disbursements to developers jumped in Q2.

But overall disbursements hardly grew and, unless the company begins to see meaningful growth, keeping bad loan ratios under control could be difficult. The outlook on disbursements is not dire. In fact, analysts have taken it as positive since disbursements are back to pre-covid levels.

The stamp duty concessions by various states and other incentives to boost real estate sales seem to have shown some results. According to a report by Knight Frank, residential real estate sales improved to 55% of pre-covid levels in Q2. Also, the government announced measures on Thursday that seek to boost residential real estate sales.

Even so, for housing finance providers such as LIC Housing Finance, the road to growth is long. The challenges may weigh on profitability. Such signs were visible in Q2 itself.

Despite a 60% drop in provisions, LIC Housing Finance reported just a 2% increase in net profit. The reason was the lack of growth in net interest income due to a combination of low growth and falling interest rates.

Even as challenges over growth persist, the company’s bigger worry is asset quality. The headwinds from the covid-19 pandemic have not disappeared and the need to increase provisions may crop up again. For the September quarter though, bad loans, or stage three of expected credit loss (ECL) assets dipped to 2.79% of the loan book from 2.83% in the previous quarter.

Perhaps, investors are still wary on asset quality as well as on growth. The stock fell about 3% on Thursday and, despite its recent gains, it trades about 35% down from its January highs.

It also trails far behind the biggest housing finance company HDFC Ltd’s share price.

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