LIC Housing Finance Faces Tepid Loan Growth as Margin Pressure Persists

Investment View and Valuation

Motilal Oswal Financial Services Limited retained its Neutral rating on LIC Housing Finance in its August 1, 2026 Q1 FY27 results update. The broker sees no near-term catalyst because loan growth remains modest, repayments and balance transfers remain elevated, and margins face pressure from intense competition in individual home loans.

The target price is Rs 580, based on 0.6 times FY28E price to book value, compared with the current market price of Rs 523.

Q1 FY27 Financial Performance

LIC Housing Finance reported Q1 FY27 profit after tax of about Rs 1,490 crore, up about 9 per cent year on year and in line with Motilal Oswal's expectations. Net interest income rose about 1 per cent year on year to approximately Rs 2,080 crore, also in line with estimates.

Fee and other income declined 26 per cent year on year to Rs 42 crore. Operating expenditure increased about 16 per cent year on year to Rs 340 crore, taking the cost-to-income ratio up about 225 basis points year on year to 16.1 per cent. Higher employee costs reflected an additional Rs 22 crore gratuity provision due to higher G-Sec yields.

Pre-provision operating profit declined about 3 per cent year on year to approximately Rs 1,780 crore. The company reclassified recoveries from written-off loans from other operating income to the credit-cost line. Net credit cost was negative Rs 111 crore, or annualised negative 14 basis points.

Loan Growth and Disbursements

Total disbursements grew about 14 per cent year on year to approximately Rs 15,000 crore. Individual home-loan disbursements grew about 8 per cent, while non-housing individual disbursements rose 20 per cent. Non-housing commercial disbursements fell about 27 per cent. Builder and project-loan disbursements increased to Rs 870 crore from Rs 160 crore a year earlier.

However, the repayment rate was 17 per cent and net balance-transfer outflow was about Rs 1,500 crore, constraining net growth. The overall loan book stood at Rs 3,22,100 crore, up about 4 per cent year on year and broadly flat sequentially. Home loans grew about 4 per cent and the non-housing individual book grew about 10 per cent.

Margins and Management Outlook

Margin pressure persisted after portfolio repricing. Q1 FY27 net interest margin declined about 20 basis points sequentially to approximately 2.6 per cent as reported loan yields fell about 10 basis points sequentially to 9.12 per cent. The cost of borrowing was broadly stable at about 7.28 per cent, resulting in a spread decline of about 10 basis points to approximately 1.84 per cent.

Management guided for FY27 loan-book growth of about 8-10 per cent, disbursement growth of about 10-12 per cent and net interest margin of around 2.6 per cent. Borrowing costs are expected to rise marginally by about 3-4 basis points. Management aims to offset home-loan pricing pressure and balance-transfer outflows through a greater mix of higher-yielding loan-against-property, lease rental discounting and developer-finance loans.

Management stated that LAP and LRD offer yields about 150 basis points above individual home loans. These portfolios grew about 20 per cent in Q1 FY27, with incremental lending rates around 9.4 per cent. Developer finance is expected to become a meaningful growth driver, but LIC Housing Finance remains cautious about lending below about 8 per cent and is selectively targeting Grade-B developers with credit discipline. Developer-finance lending rates are around 10.5 per cent.

The company also plans a calibrated affordable-housing rollout and digital investments to improve customer acquisition, turnaround time and operating efficiency.

Asset Quality and Credit Costs

Asset quality was stable, with gross Stage 3 and net Stage 3 at about 2.15 per cent and 1.12 per cent, respectively. Stage 3 provision coverage declined about 180 basis points sequentially to 48.2 per cent.

NPA recoveries were approximately Rs 540 crore during the quarter. Management expects a further Rs 500-600 crore of recoveries in coming quarters. It guided for FY27 credit costs of about 10-15 basis points and gross NPA below 2 per cent, supported by stressed project-loan recoveries. Motilal Oswal models net credit costs of 5 basis points in FY27E and 10 basis points in FY28E.

Estimates and Return Profile

Motilal Oswal cut its FY27E PAT estimate by about 3 per cent to Rs 5,680 crore, primarily to reflect lower net interest margin, partly offset by lower credit costs.

The broker estimates advances and PAT compound annual growth rates of about 7 per cent and 3 per cent, respectively, over FY26-28E. It forecasts FY28E return on assets of 1.7 per cent and return on equity of 12 per cent.

Key Risks

• Weaker-than-expected disbursement and loan growth.
• Sustained balance-transfer outflows.
• Competitive repricing in home loans.
• Higher funding costs.
• Failure of higher-yielding segments to support margins.
• Slower recovery from stressed developer-finance accounts.