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Management meeting update. We returned fairly positive from a meeting with Mr
V.K. Sharma, the new Chief Executive of LIC Housing Finance. Mr Sharma is confident
of growth and assured us that the bribes-for-loan scam is not a cause for concern.
LICHF’s retail lending continues to grow rapidly though the company has temporarily
paused new approvals of developer loans. We retain our positive outlook for the
business amidst concerns about high bulk borrowings rates which can impact NIMs for
NBFCs. Retain ADD rating.
Negligible impact of the scam
Mr V. K. Sharma, the new CEO of LIC Housing Finance, assured us that the operations of LICHF
remain strong and that the recent housing loan scam implicated only an individual in the
company. The company has emphasized that the loans under consideration by CBI are secured,
performing and in compliance with relevant regulatory norms. Notably, all developer loans aboveRs100 mn disbursed by LICHF are appraised by CRISIL.
Retail business seems to be on track
LICHF has not seen any slowdown in the retail lending business. The company has reported about
36% loan growth in September 2010 and we expect the pace to continue in 3QFY11 as well. We
are modeling about 35% loan growth for March 2011 which will likely moderate to about 30%
by March 2012.
LICHF has currently stopped developer loans. The company continues to disburse loans approved
in the past though it has not sanctioned any fresh proposals. The management highlighted that
the company’s processes remain robust and that they do not find any cause for concern in the
developer-loan portfolio; they propose to re-commence their developer loan business shortly.
Higher borrowings provide a risk to margins
We believe that the current scenario poses risk on the near-term margins of NBFCs. While liquidity
seems to be easing from the peak deficit of Rs1.8 tn in December 2010, liquidity will continue to
remain under pressure. Interest rates in shorter end on the yield curve—interest rates below one
year increased by about 4% between April and December 2010 though we have seen a respite of
50-75 bps in the past week. In 3QFY11, LICHF issued NCDs are 9.4% as compared significantly
higher than marginal borrowings cost of 7.9% in 2QFY11.
LICHF has passed on the rise by raising lending rates by 50 bps for existing customers from
October 2010 followed by another PLR hike 50 bps from January 2010. The 5-year fixed rate
scheme is now offered at 9.75-10.5% as against 9.25-9.75% offered earlier. Higher yields
on the existing loan book and developer loans are largely supporting about 2% spreads for
LICHF even as marginal spreads in the retail business remain under pressure. We are
modeling about 15-20 bps yoy contraction in spreads in FY2012. A delay in resuming in
developer lending can affect margins in the near term.
Recent NHB norms pose risks to near-term earnings
NHB has recently revised standard asset provisioning requirements on teaser loans—in line
with the RBI’s proposal for banks which was announced in the last credit policy review.
Teasers loans will now attract standard asset provisions of 2% (NIL earlier). NHB has
provided some respite to housing finance companies—risk weight on developer loans in the
standard category have been reduced to 20 bps from 40 bps for March 2011; the risk
weights will be reinstated at 40 bps from September 2010.
LICHF’s dual rate home loan portfolio currently aggregates Rs100 bn, of which about 50%
are 5-year fixed rate loans. It is not clear if the 5-year fixed rate loans will be classified as
‘teaser loans’. If these loans are classified as ‘teaser loans’, LICHF will need to make
incremental provisions of Rs0.8 bn; if these loans are not considered as ‘teasers’, LICHF will
not have any incremental provisioning burden.
Focus on building sustainable growth
Mr V K Sharma is the former the Zonal Manager for the Southern zone of LIC of India (since
2009). He is credited with the turnaround of the zone in FY2010. Mr Sharma has experience
of about 30 years in operations and marketing at LIC. Mr Sharma is keen on maintaining the
growth traction at LICHF as also maintaining margins. LICHF has grown rapidly in the past
two years and he would like to set up capacities that can support consistent high growth.
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