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LIC Housing Finance (LICHF)
Banks/Financial Institutions
Stock correct sharp, current price factors business moderation. We believe the
business traction at LICHF will likely moderate on the back of corruption charges against
its CEO. LIC has reiterated that all internal procedures are intact and proposes to
appoint Mr VK Sharma, Southern Zonal Manager of LIC as its new CEO. We reduce
estimates and cut our price target to Rs1,030 (from Rs1,325) to factor in the
moderation. The sharp stock correction already factors the new scenario; upgrade to
ADD (from REDUCE).
Moderating business traction
We believe LIC Housing Finance (LICHF) will follow a more conservative growth strategy on the
back of the recent CEO exit. LIC has highlighted that the company has complied with all internal
procedures in case of the loans under scanner and as such overall business impact may not be
significant. LIC proposes to appoint Mr VK Sharma as the new Chief Executive of LICHF.
Lower loan growth…. We believe that the company will moderate its business traction (36% yoy
loan growth for last 5-6 quarters) on the back of the recent episode. We are accordingly modeling
loan growth of 27% and 23% for FY2012E and FY2013E from 30% and 26% expected earlier.
…and low margins. We are modeling about 5-15 bps contraction in spreads as well. We expect
developer lending to slow down on the back of the recent episode thereby driving down margins.
Notably, LICHF reported spreads of 2.1%—lending to developers at high interest rates contributed
about 40 bps to the overall spread; spreads in the retail business were 1.7%. LICHF offers new
home loans at 9.1% (five-year fixed rate product) and 8.9% as compared to marginal borrowings
cost of about 7.9%. The company has recently raised lending rates for existing customers by 50
bps to support its spreads. We believe that LICHF will now need to raise lending rates for new
loans in case borrowing costs move up further. Business volumes may see some pressure in this
scenario.
Provisions low for now, will likely move up. LICHF currently makes almost negligible provisions
and as such we expect the provision cost to rise hereon, on a low base. Management will also
likely adopt a more conservative stand on this, on the back of aggressive growth over the past two
years.
LICHF makes standard asset provisions of 70 bps on all developer loans and 10 bps on retail
loans somewhat higher than the regulatory requirements, NHB requires housing finance
companies to make 40 bps provisions on developer loans, no provisions required for retail
loans. This is significantly lower than the requirement of banks—150 bps on developer loans
and 40 bps on retail loans (2% on dual-rate retail loans). We believe NHB will likely revise
regulations and the provisions for LICHF and other housing finance companies will have to
increase.
It’s all in the price, upgrade to ADD
We believe the recent sharp (29%) correction in the stock price already reflects slower
business traction. LIC has highlighted that the company has followed all internal procedures
withy respect to the loans in consideration (by CBI) and the issue pertains to individual
misconduct. If this is accurate, the impact on overall asset quality may be limited. Notably, in
the past, LICHF went slow on developer lending when NPLs in this segment increased. The
company has since then strengthened its internal processes and now developer loans above
Rs100 mn are independently appraised by CRISIL.
We are reducing our price target to Rs1,030 from Rs1325. At our price target, the stock will
trade at 10X PER and 2X PBR FY2012E for 22% EPS growth and 20-22% ROE in the
medium term (down from 26-27% earlier).
The Central Bureau of Investigation (CBI) arrested the CEO of LICHF last week, along with
the senior bankers from PNB, BoI and an independent director at Central Bank of India in
connection with a housing finance racket. The CBI has alleged that senior officials have
accepted bribes to grant loans to various real estate companies. Senior officials of Money
Matters Financial Services, the arranger and facilitator of these deals, have also been
arrested. The CBI has conducted raids in Mumbai, Delhi, Chennai, Jaipur, Kolkata and
Jalandhar and five separate cases have been registered in this regard. CBI is yet to conclude
the investigation. LICHF has since clarified that the total loan book under consideration is
Rs3 bn (0.7% of the current portfolio)—these are secured loans and not NPLs.
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