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Mortgage lender Indiabulls Housing Finance Ltd managed to keep its asset quality from worsening sharply due to the pandemic in FY21. While its headline asset quality metrics have worsened over the year, this is partly due to the contraction in its loan book by design.

The lender’s gross bad loan ratio climbed to 2.66% in the March quarter from 1.8% a year ago. During the same period, the loan book shrank 9.6%, thus exaggerating the headline ratios slightly.

To be sure, Indiabulls Housing Finance’s bad loan pile has grown 25%, in an indication that stress has indeed risen. But much of this was expected given the pandemic.

Not out of the woods
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Not out of the woods

While bad loan accretion is no surprise, what sets apart lenders is the extent of provisions they have amassed. After all, having enough or even more insurance against adverse effects is the best safeguard for future profitability. The company held provisions totalling 2,458 crore towards stressed loans. On an aggregate level, its provisions are three times of what is required as per regulations. Even so, it remains to be seen whether these provisions would suffice in the wake of the second wave.

The management seems to think so and has pointed out that provisions, along with its strategy to achieve an asset-light balance sheet, have made it more resilient to the adverse impact of the second wave. What works for the lender is that it has not restructured any loan during the quarter and its total restructured loan pile is negligible.

For now, investors have taken these as a positive, reflecting in the roughly 9% gains in the share price on Thursday. The doubling of net profit from the year-ago period also provided cheer.

The boost to profitability has been largely due to a sharp drop in finance costs due to the fall in interest rates on both loans and bonds. Given that interest rates are unlikely to rise, Indiabulls Housing Finance may continue to benefit from them.

Meanwhile, the lender has also been shedding its wholesale loan book in a bid to reduce credit risk on its books. Indiabulls Housing Finance intends to just originate loans and service them for a fee and take only a small part of the credit risk on its balance sheet.

It has tied up with a handful of banks and HDFC Ltd to co-lend mortgage loans. In an analyst call on Thursday, the management said that it intends to conduct 80% of its business through such arrangements in the current year.

The lender wants to reduce its wholesale book to 33% of its loan portfolio by the end of the current financial year. This strategy has led to a more than 40% contraction of the loan book over the past two years. A pick-up in retail disbursements has offset this contraction to some extent in recent months.

While this helps the lender to reduce risks from stressed realty developers, a contraction of the balance sheet has also hit valuations. Shares of the lender are still meaningfully below its pre-pandemic highs of last year.

The management has indicated that its goal is to not grow fast, especially amid stressed times. It has fixed its stressed loan portfolio and also liquidity troubles it faced two years ago. The stock trades at a discount to its estimated book value for FY22.

Analysts believe that improvement in valuations now hinge on how deftly the company manages to keep its credit risk under check.

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