20 May , 2021 By : Kanchan Joshi
MUMBAI: Mortgage lender Indiabulls Housing Finance Ltd’s March quarter metrics show that it managed to prevent its asset quality from worsening sharply due to the pandemic in FY21. While its headline asset quality metrics have worsened over the year, the damage is lower than anticipated.
The lender’s gross bad loan ratio has climbed to 2.66% from 1.8% a year ago. To be sure, this increase is also due to the loan book shrinking 9.6% during the same period. However, Indiabulls Housing Finance’s bad loan pile has grown 25%, an indication that stress has indeed risen. But much of this was expected given the pandemic.
While bad loan accretion is no surprise, what sets apart lenders is the extent of provisions they have amassed. After all, having enough or even more insurance against adverse effects is the best safeguard for future profitability. The company held provisions totalling Rs2,458 crore towards stressed loans. On an aggregate level, its provisions are three times more than what is required as per regulations. Even so, it remains to be seen whether these provisions would suffice in the wake of the second wave. The management seems to think so and has pointed out that along with its strategy to achieve an asset-light balance sheet has added resilience to the adverse impact of the second wave.
The lender’s core operating metrics disappointed. Its core interest income took a beating because of interest reversals. These were a combination of increase in defaults and the judicial rule of offsetting compound interest on all borrowers for the moratorium period. Net interest income dropped 7.7% year-on-year. The doubling of net profit from year ago period was largely due a sharp fall in finance costs as interest rates on loans and bonds have dropped.
The lender has been shedding its wholesale loan book and growing its retail disbursements over the past two years. It aims to reduce its wholesale book to 33% of the total by the end of this year. While this helps the lender to reduce risks from stressed realty developers, a contraction of the balance sheet has also hit valuations. Shares of the lender are still below its pre-pandemic highs of last year.
Most importantly, Indiabulls Housing Finance’s valuation has not recovered from the blow of the liquidity crunch episode in late 2018. While asset quality management would help, it remains to be seen whether its strategy of being asset-light would help it regain some of the premium it lost to the liquidity episode.
0 Comment