LIC Housing Finance (LICHF) delivered a healthy FY24 with improvements in net interest margin (NIM) and credit costs and an improved return on assets of 1.7 per cent compared to an average of 1.3 per cent between FY14-FY23.
Loan growth was low due to technology upgrades to the platform in H1FY24, though momentum improved in H2FY24.
In Q4FY24, the net interest income (NII) came in at Rs 2,250 crore.
Yields contracted by 8 basis points sequentially, while cost of funds (CoFs) rose 6 basis points quarter on quarter (Q-o-Q), leading to spreads at 2.1 per cent (down 14 basis points Q-o-Q).
Operating expenditure jumped 33 per cent year-on-year (Y-o-Y) (46 per cent Q-o-Q) due to an increase in employee cost on account of wage revision (Rs 320 crore) and gratuity (Rs 220 crore).
Provisions at Rs 430 crore (down 1.8 per cent Q-o-Q) meant a stable credit cost of 60 basis points.
Net profit for Q4FY24 stood at Rs 1,080 crore, down 9 per cent Y-o-Y due to higher tax outgo on account of adjustment for prior years (Rs 120 crore).
Loan book was up 4.3 per cent Y-o-Y and asset quality jumped with gross stage 3 asset ratio at 3.3 per cent (4.3 per cent in Q3). The stress book (stage 2 + stage 3) improved 129 basis points Q-o-Q to 7.5 per cent and the provisioning coverage ratio (PCR) improved to 51 per cent from 49 per cent in Q3FY24.
The NIM was at an all-time high of 3.1 per cent in FY24, due to the re-pricing of existing loans, as well as write-backs of interest income on net performing assets (NPA), accounts aggregating about Rs 130 crore, which upgraded to standard. Management guidance is for NIM compression in FY25, driven by yield moderation and the rising cost of borrowing.
NIM may drop to between 2.7-2.9 per cent for FY25 and FY26.
The Gross Stage 3 declining 100 basis points Y-o-Y to 3.3 per cent, including write-offs of Rs 2,600 crore in FY24 means a significant reduction in stressed loan exposures.
LICHF is also doing a pilot of asset reconstruction companies or ARC sales.
It has a technical written-off pool of Rs 4,000 crore and credit costs may decline to 45 basis points from 60 basis points in FY24.
Stronger loan growth over FY25-26 may compensate for NIM compression.
Reported net profit growth was 65 per cent Y-o-Y in FY24.
This creates a high base effect which may lead to single-digit net profit annual growth over FY24-26 and return on equity of around 14 per cent.
Greater predictability of earnings and higher loan growth may lead to a positive re-rating from current valuations of 0.9 times to price to book.
One key risk is the impact of the RBI guidelines on HFCs to charge interest only when the cheque/demand draft is encashed, which may compress NIM further.
There s high competitive intensity. LICHF has invested in new channels including direct marketing executives (DME) and tied up with a few lead management companies.
It now monitors and follows up on leads. It has also added 44 new cluster offices, which could push loan growth (from just 4 per cent Y-o-Y in FY24) to annual growth of 10 per cent over FY24-26.
If there is a cut in repo rates in H2FY25, it could result in further pressure on yields.
The company has a policy of taking technical write-offs and building management overlay exceeding expected credit loss provisions.
It took technical write-offs of Rs 2,600 crore in FY24 and has a total written-off pool of Rs 4,000 crore as of Mar 24 with a management overlay of Rs 1,700-1,800 crore.
It is making efforts at stressed asset resolutions through auctions and pilot sales to ARC.
Any ARC transaction will be all-cash deals (with associated haircuts).
This should further improve asset quality.
There were analyst upgrades on the improved asset quality and the expectation of loan growth pickup.
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