Home / Markets / Mark To Market /  LIC Housing's net interest margin cause for anxiety

Shares of LIC Housing Finance Ltd plummeted by 8.5% on Wednesday in reaction to its September quarter (Q2FY23) earnings. The company’s Q2 profit after tax stood at 305 crore, which is a 67% sequential drop. Profits are far below forecasts of analysts, paving the way for reductions in FY23 earnings estimates.

To retain its high quality consumers, LIC Housing has converted loans worth about 9,000 crore from fixed-rate to floating rate. One of the impacts of this re-pricing has been an accounting loss of 275 crore, according to the company. Against this backdrop, on a sequential basis, net interest income fell by 28% and net interest margins (NIM) dropped by 74 basis points (bps) to 1.8%. One basis point is 0.01%. Some analysts were expecting NIMs to improve in Q2.

A letdown
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A letdown

LIC Housing’s management has tried to assuage the concerns of analysts about margins, but not everyone is satisfied.

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“We are not completely convinced with the management’s rationale and the extent of margin impact from switching fixed-rate loans to a floating portfolio. Clearly, the rising interest rate scenario is unfavourable for LIC Housing and a step like this makes us increasingly cautious on the stock," said Krishnan ASV, senior vice president, institutional research, HDFC Securities.

“The company does not have a large developer portfolio to offset the high competitive intensity in the core mortgage book. A larger risk we see in LIC Housing is the sheer volatility in earnings, which is unusual and undesirable for a housing finance company," he said.

If the momentum in the housing sector persists, it could well support LIC Housing’s loan growth. Shares of the company are now down about 17% from their 52-week highs seen in September on NSE.

“The stock seems to have bottomed out at current levels and we do not foresee a sharp correction from here on," said Gaurav Jani, an analyst at Prabhudas Lilladher.

After a forgettable Q2, investors should track any further impact from the conversion of loans in the coming quarters. Improvement in NIM is a key trigger for the stock.

In the third quarter, conditions remain upbeat for recovery in NIM with the impact of 115bps rate hikes by the company coming into play. In its earnings call, the management said, on a full year basis, margins in FY23 would be better compared to FY22 when the measure stood at 2.29%. All eyes will now be on the recovery in NIM in the second half of FY23.

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