LIC Housing Finance: Invest

Continued momentum in the retail home loan segment should drive growth

The housing finance space has been growing steadily at 16-19 per cent over the last two years, even while other segments such as corporate lending languished below 10 per cent in recent times.

The inherently strong demand in the retail housing loan market has held LIC Housing Finance, one of the largest lenders in the space, in good stead in the latest September quarter too.

The company’s loan book grew 17 per cent year-on-year, led by strong growth in the retail segment. The housing finance space is likely to get a further boost, thanks to the budget proposals for real estate. Key proposals such as increasing the interest deduction limit on home loans and opening up funding avenues for developers should boost buyer sentiment.

While the RBI’s recent regulatory changes for non-banking financial companies (NBFCs) do not apply to housing finance companies (HFCs) for now, the National Housing Bank (NHB), the governing body for HFCs, is likely to implement them at a later date.

But conforming to the new norms will not be an issue for LIC Housing Finance, as it already follows a 90-day norm for bad loans and is well capitalised. The limit on deposits (1.5 times of net worth), if implemented, will also not have a significant impact as the company’s deposits are well within the limits (0.15 per cent).

Besides, LIC Housing Finance has a diversified funding mix, and has been able to switch between different funding sources to maintain its margins. As interest rates start to soften, borrowings from banks can help it bring down cost of funds.

At ₹437, the LIC Housing Finance stock trades at 1.6 times its estimated 2015-16 book value, less than half that of HDFC, and in line with its own historical average of 1.6 times.

Continued momentum in the retail mortgage space should drive about 18 per cent loan growth for the company over the next two years. A pick up in the developer loan segment will provide further fillip to growth in loan book and earnings. Investors with a two to three year horizon can buy the stock at current levels.

Good growth

Despite increasing competition from banks, LIC Housing Finance has been able to grow its loan book by 20 per cent during the last two years.

The company has been offering special schemes to garner higher market share. Focus on dual rate loans, for instance, offered mainly to the salaried segment has helped growth. The company continued the strong momentum, growing its loan book by 17 per cent in the recent September quarter.

The outstanding mortgage portfolio as on September was ₹97,528 crore. Of this, the retail loan portfolio, accounting for 97 per cent, grew a healthy 18 per cent year-on-year.

But the developer segment remained weak, and the loan book in this segment declined 4.5 per cent. The company has not grown this portfolio aggressively given the asset quality pressures in the segment.

Disbursement growth, which remained subdued in the last couple of quarters, also went up sharply to 21 per cent during the recent September quarter.

The growth in loans for the company should continue to be driven by the retail segment, thanks to strong demand from the mid-income group. Also, any pick-up in the higher yielding developer loans will add to the company’s profitability.

Margins steady

In the last couple of years, the cost of funding for housing finance companies through term loans went up as banks moved to the base rate mechanism — the companies had to pay at least the minimum benchmark rate. While LIC Housing Finance saw its net interest margin (NIM) decline from 3 per cent levels three years back to 2.25 per cent in 2013-14, it has been able to keep the margins steady at 2.2-2.3 per cent in recent quarters.

Given the rising competition in the home finance market, the company may not be able to increase lending rates substantially. This may limit upsides in margins. However, as in the past, the diversified funding mix of LIC Housing Finance and the flexibility to switch between these sources should help it maintain margins.

With the RBI signalling a rate cut early next year, lower cost of bank borrowings should help reduce the company’s cost of funds. Overall, the company should be able to maintain its margins in the 2.2-2.3 per cent range.

LIC Housing Finance has been able to maintain good asset quality in the retail segment. The gross non performing assets (GNPA) as a percentage of retail loans declined to 0.38 per cent as of September quarter from 0.4 per cent in the June quarter.

Even the developer segment has seen some easing of asset quality pressure. The GNPA in this segment is down to 0.63 per cent from 0.8 per cent in the June quarter, thanks to a recovery of about ₹136 crore during the September quarter.