Can LIC Housing Fill HDFC's Big Shoes?

LIC Housing Finance—India’s second largest non-bank housing financier—could be standing at the edge of an opportunity. 

With the impending merger of Housing Development Finance Corporation Ltd and HDFC Bank expected to be completed by July, LIC Housing Finance Limited will emerge in pole position among housing lenders when HDFC vacates the spot. LIC HFL held a total loan book of Rs 2.68 lakh crore in December 2022, as compared to HDFC’s Rs 7 lakh crore. 

Being the largest housing finance company could improve LIC HFL’s pricing on debt capital and also help it widen its customer base. But the opportunity could also be constrained by factors that have dragged LIC HFL in the past—growth and margins. 

“Growth has always been a pain point for LIC Housing Finance,” Nikhil Shah, research analyst at Nirmal Bang Institutional Equities, told BQ Prime.

Growth has presented troubles for LIC in the past because “the composition of the book was towards [loans against property] and wholesale loans,” Vijaya Rao, senior analyst at Ashika Broking, told BQ Prime.

LIC HFL’s margins have were also held back by its loan book having a higher share of fixed rate loans, Rao added. The proportion of pure floating loans in LIC HFL’s book has risen from 92% in FY20 to 98% at the end of December 2022. 

A shift in the loan book’s composition and higher pricing flexibility augurs well for LIC HFL but the lender’s margins were dragged down sharply over the last quarter because of a 28% year-on-year jump in provisions to Rs 7,285 crore. LIC HFL’s margins have also responded more slowly to rising interest rates in the broader market because the lender reprices its loans with a lag of about 3-months, Rao said. 

“This quarter we’ve made higher provisioning to the tune of over 760 crore. This has been made to increase our overall [provision coverage ratio] substantially,” Y Vishwanatha Gowd, managing director and CEO of LIC Housing Finance, told analysts in a conference call on February 7. LIC HFL’s Stage-3 PCR rose from 43.6% in Q2 FY23 to 50.8% in Q3 FY23. 

LIC Housing Finance did not respond to list of questions sent by BQ Prime. 

The Stage-3 PCR ratios for LIC HFL’s peers PNB Housing Finance and Indiabulls Housing Finance stood at 35% and 43% respectively in Q3 FY23. While Gowd told analysts that the substantial uptick in provisions was driven by a “philosophy of maintaining very good PCR to be in line with the industry,” analysts BQ Prime spoke with said that the jump in provisions was atypical. 

The jump in provisions also dragged down LIC HFL’s net profit by 37% year-on-year to Rs 480 crore in the third quarter.

Oversized Shoes To Fill

While HDFC’s exit from the housing financers playground will free up room for other aspirants, analysts don’t expect LIC Housing Finance to immediately take over the mantle. 

HDFC’s decisions on interest rates may have influenced the broader market in the past but it’s unlikely that LIC HFL will play that role in the near future. “It won’t be in the shoes of HDFC,” Rao said, noting that everyone is looking at LIC Housing Finance to be the leader because there aren’t any other large players in the segment.  

Given the loan mix, strong presence and parentage, LIC is still likely to deliver healthy growth, Rao said, noting that the firm’s management has given guidance of a 13% year-on-year jump in overall disbursements in FY23. “Key monitorable for the company would be potential slippages in the restructured pool and higher interest rates,” she added. 

Overall, there may be an opportunity lingering for LIC HFL as July approaches but to make good use of it, the lender might need to iron out speed bumps that have hindered it from long before.