LIC Housing Finance shows resilience amid crisis; bad loan stress remains2 min read . Updated: 25 Aug 2020, 10:03 PM IST
Nearly 25% of the lender’s loan book is under moratorium, higher than 22.4% of industry leader HDFC
LIC Housing Finance Ltd gave a lot of good news in its June quarter results and investors have taken note of these.
Shares of the housing finance company surged more than 8% on Tuesday and the beat on its net profit front wasn’t the only reason for the investor cheer.
The profit was driven by a stronger-than-expected bounce-back in disbursements. Retail loan disbursals reached 62% of previous year levels in June, taking average disbursals for the quarter to 35% of the year-ago period. This aided the 3% year-on-year growth in net interest income. Sequentially, net interest income was up 8%.
The lender’s metrics alleviate looming concerns over loan growth to some extent. Adding to this are the incipient signs that asset quality pressures may have reduced.
Loans under stage three of expected credit loss were also steady sequentially at 2.83% of the total book. In other words, the lender did not see any fresh pain on the asset quality front during the quarter.
To be sure, part of this could also be because of the moratorium granted to customers. Indeed, 25% of the lender’s loan book is under moratorium, slightly higher than 22.4% of industry leader HDFC Ltd. Here, the relief is that the proportion of retail loans under moratorium is lower at 16%.
Another factor noted by analysts at Motilal Oswal Financial Services Ltd is the decline in loans with repayment overdue past 60 days or stage two loans. Such loans dropped to 3.97% in the June quarter from 4.66% in the March quarter. Having said that, the worry over asset quality persists.
That the real estate sector is yet to see a significant recovery is an added worry. A recessionary year such as the current one is unlikely to result in a quick recovery of the sector. That means lenders such as LIC Housing Finance would have to be careful in their lending decisions.
“In the current pandemic situation, the company would face further headwinds on asset quality, especially in LAP and builder loans," wrote analysts at Motilal Oswal in a note. LAP stands for loans against property.
LIC Housing Finance’s big pain point was the developer book and it remains so. The borrowing propensity of developers has dwindled given the prolonged stress of the real estate sector. The pandemic has only exacerbated their woes.
The stock trades at a multiple of 0.8 times its estimated book value for FY21, which is lower than HDFC’s 3.4 times valuation.
Notwithstanding Tuesday’s rise in prices, the company’s valuation seem to reflect the asset quality concerns.