Increase in provision mars LIC Housing’s Q3 earnings outlook

A closer look at the bifurcation shows that a large chunk of the provision has been made for higher risk stage-3 category. In the earnings call, the company’s management clarified that this was an act of prudency. That is, it was an effort to improve the company’s asset quality, and it does not anticipate immediate slippages.

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Investors aren’t thrilled, though. LIC Housing’s shares fell by nearly 3% on Tuesday. “Provisions were higher than expected and we couldn’t get a concrete reasoning behind the increase in provisions. This is despite the asset quality remaining stable,” said Gaurav Jani, research analyst, Prabhudas Lilladher.

Note that the company holds about 83% of its loan book from the individual home loans segment catering predominantly to the salaried class. So, the requirement for higher provisioning isn’t necessary as the default risks are minimal, he added.

Consequently, as by December end, LIC Housing’s provision coverage ratio stood at 50.8% versus 43.65% at September end. Another sour point was the performance of its mainstay home loan business. In Q3, the individual home loan disbursement fell 10% y-o-y. The disbursements in this segment were impacted by rising home loan rates. While this concern is not specific to LIC Housing, in a rising interest rate scenario, investors will have to closely monitor this metric.

Another key parameter, net interest margin (NIM) recovered 60 basis points (bps) sequentially to 2.4%, aided by rate increases. In Q3, the company took a 35bps interest rate hike, the management said. One basis point is 0.01%. Since cost of funds are set to inch higher, NIM is unlikely to see a sharp expansion from hereon.

Nonetheless, after a dismal Q3 performance, the company’s FY23 and FY24 earnings estimates are poised to see a cut. This does not bode well for investors’ sentiment, especially given that stock’s performance has been unimpressive. So far in CY23, the stock has corrected nearly 10%.

“The predictability of earnings, either due to margins or asset quality or growth, has been of a concern with investors, off late, which is getting reflected in the stock performance,” said Deepak Shinde, institutional research analyst at HDFC Securities.