While overall credit growth remained muted in FY21, individual housing loans saw a healthy uptick – more than one-fifth of the incremental bank credit in FY21 was deployed in housing loans. Banking on the industry tailwinds of low interest rate regime, stamp duty cuts and the work-from home induced need for bigger and better homes, LIC Housing Finance (LICHF) also saw its highest ever disbursements (up 197 per cent y-o-y) in the March 2021 quarter. Disbursements in FY21 were up 17.7 per cent y-o-y to ₹55,223 crore, with individual loans, LAP, and developer loans, up 114, 6 and 15 per cent, respectively.

However, the company also reported a significant deterioration in asset quality. We believe the worse is not yet over and more stress is looming in the non-core portfolio (ie loans other than individual housing loans constituting about 22.2 per cent of overall loan book) of the company. Besides the company’s higher gross non-performing assets (GNPAs) in individual loans (reflective of weak underwriting policies) as well as lower provisioning (just above 40 per cent of stressed assets), vis-a-vis peers also raise concerns.

These factors, coupled with the likely stress from the second wave of the pandemic, could, besides denting profits, also have a bearing on the company’s capital adequacy, which is already at the borderline.

Considering all this, its current valuations of 1.13 times the FY21 book value (1.1 times post the preferential allotment to LIC) seems expensive. While the stock does trade lower than its peers due to its inherent limitations in the business model (HDFC, for instance, trades at above 4 times), the valuation is about 18 per cent above its three year average price to book of 0.9 times. Hence, investors can exit the stock at current levels.

Weak underwriting

In FY21, despite the Supreme Court having a standstill on NPA classification, LICHF saw a 54 per cent spike in its Stage-3 assets (NPAs under the Ind-AS) to ₹9,558 crore. This came in despite the unlocking phase leading to an economic revival in the country in the March 2021 quarter, where other financial institutions saw a moderation in NPAs compared to the proforma numbers reported by them in December 2020 quarter.

The incremental NPAs of about ₹3,600 crore during FY21, largely stemmed from the company’s non-core portfolio (about two –thirds of slippages) – ₹1,980 crore from its LAP portfolio (including Lease Rental Discounting) and ₹448 crore from the developer loan book. The NPAs in these portfolios account for 8 and 18 per cent of the LAP and developer book, respectively at the end of FY21, compared to 3.3 and 17.8 per cent, respectively in FY20.

Even the granular individual home loans (which account for 77.9 per cent of the company’s outstanding loan book), resulted in an incremental NPA of ₹1,228 crore in FY21. In the individual housing loans portfolio, the company’s bad loans were about 1.89 per cent, compared to 0.99 per cent in HDFC in FY21.

The overall Gross Stage-3 assets account for 4.12 per cent (2.9 per cent in FY20) of the outstanding loan book and another 6.2 per cent (4.6 per cent in FY20) is in Stage 2. Increase in stage-2 assets that represent outstanding dues for 31 to 90 days, could be a likely indicator for further upcoming stress in the loan book.

Inadequate provisioning

While the Loan to Value ratio of near 48 per cent acts as a cushion, the company’s provisioning still seems inadequate. Including ECL (Expected credit loss), covid related provisions and impairment on account of restructuring, LICHF’s Provision Coverage Ratio ie PCR (for Stage 3 assets) is at just above 44 per cent (compared to over 55 per cent in the case of HDFC). Besides, the ECL provisioning for Stage-2 assets is at a mere 0.3 per cent.

During the first nine months of FY21, despite the Supreme Court’s standstill on NPA classification, financial companies reported Stage-3 assets on a proforma basis and created sufficient provision buffers. Besides, improving economic conditions during the unlocking phase, brought down the actual slippages lower for many in the March quarter, when compared to their proforma numbers. LICHF however, did not create any such buffers and maximum provisions were set aside in March 2021 quarter only. Not only were the slippages higher than anticipated (proforma Stage -3 around 3.68 per cent in December 2020), but provisions also jumped 14 fold in the March 2021 quarter. Consequently, net profits dropped by 5 per cent y-o-y in March 2021, to ₹398.9 crore.

While the management indicated a near 98 per cent collection efficiency in March and April 2021, the subsequent lockdown could pose a threat to the asset quality from hereon. Any deterioration in asset quality could dent profits in the coming quarters as well.

This coupled with a healthy expected growth in the loan book, could strain its capital adequacy ratio, which besides hampering further growth can also have a bearing on the dividend policy of the company. RBI’s new guidelines define eligibility criteria for NBFCS (effective from FY22 onwards) for declaring dividends. One such criteria mandates a minimum CRAR for HFCs in the previous three financial years - at least 13 per cent in FY20, 14 per cent in FY21 and 15 per cent from FY22 onwards. The company’s CRAR is already at the borderline at 15.28 per cent. While an equity infusion from promoters of ₹2,335 crore is awaiting shareholder approval on July 19, more capital may be required to fund the growth, given the likely stress in asset quality.

To give a perspective, despite adding ₹1,800 crore through tier 2 bonds in the second half of FY21, the CRAR only improved 139 basis points (y-o-y) in FY21 to 15.28 per cent, largely being offset by a 59 per cent y-o-y spike in overall Stage 3 assets, during the same period.


Expensive valuation

Rising bad loans

Poor provisioning