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LIC Housing Finance (LICHF)
Banks/Financial Institutions
Core performance remains strong. LIC Housing Finance reported PAT of Rs2.13 bn,
up 39% yoy but 8% below estimates. Core earnings (up 52% yoy and 9% ahead of
estimates) were driven by strong loan growth (36%) and higher NIM. Large capital
gains and standard asset provisions distorted reported earnings. LICHF’s retail business
continues to grow briskly even as the developer lending has taken a pause. We expect
earnings traction to continue despite margin pressure in the current environment.
Valuations remain inexpensive, we tweak estimates, retain ADD and target of Rs206.
Strong operational performance
LIC Housing Finance (LICHF) maintained its growth traction during 3QFY11—core PBT (PBT
excluding extraordinary items, provisions and capital gains) was up 52% yoy and 9% above
estimates at Rs3.5 bn. Retail disbursements were up 40% to Rs42 bn driving 36% loan growth.
We expect loan growth to remain strong at 34% yoy in March 2011E which will likely moderate to
28% by March 2012E.
LICHF’s NIM expanded to 3.15% from 2.93% in 2QFY11. Reported spreads declined marginally to
2.08% in 3QFY11 from 2.12% in 2QFY11. The difference in basis for calculation of NIM and
spreads largely explains the rise in NIM despite a decline in reported spreads—LICHF’s
management has highlighted that the borrowing cost considered in calculation of spreads is the
borrowing cost on the last day of the quarter while NIM is based on average loan book.
Developer loans take a pause
Post the bribes-for-loan scam, LICHF has paused approvals for developer loans. The company
continues to disburse loans approved in the past though it has not sanctioned any fresh proposals.
Consequently, approvals to developer loans declined sharply to Rs4.8 bn from Rs17.2 bn in
3QFY10 and marginal spreads declined qoq to 1.65% from 2.12%.
The management has 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 recommence their
developer loan business shortly. We understand from market sources that developers are finding it
challenging to raise bank loans post the bribes-for-loan scam and general tight liquidity in the
system. Consequently, the interest rates for developer loans will likely remain buoyant ; this will
augur well for margins of housing finance companies.
Extraordinary items tamper reported earnings
LICHF’s 3QFY11 earnings were affected by two major one-off items
Income from stake sale in mutual fund business. LICHF sold 17% stake in LIC Mutual Fund to
Nomura for a consideration of Rs1.36 bn. While the deal was announced a couple of quarters
back, the transaction was concluded in the previous quarter.
Provision on standard assets. LICHF has dual rate home loans of Rs160 bn (including 5-
year fixed rate loan of Rs50 bn). According to the recent NHB regulation, housing finance
companies need to make a standard asset provision of 2% on ‘teaser loans’ (dual rate home
loans). LICHF is not clear if 5-year fixed rate loans will quality to be ‘teaser loans’. Currently,
the company has made provisions of Rs3.2 bn for the entire outstanding dual rate home
loan portfolio (including 5-year fixed rate home loans)—the company has utilized excess
provisions of Rs0.99 bn while the balance (Rs2.2 bn) was reflected in the provision cost for
the quarter.
The management proposes to seek clarification from NHB on the definition on ‘teaser loan’.
In case the 5-year fixed rate home loans are considered as a ‘teaser loans’, the management
will need to review its business strategy.
Slippage ratio increased to 0.28% in 3QFY11 from 0.14% in 2QFY11 but gross NPL ratio at
0.7% and net NPL ratio at 0.2% was stable qoq.
Risk to margins for bulk borrowers, some buffers with LICHF
Pressure on liquidity. We believe that the current scenario poses risk on the near-term
margins of NBFCs. While the situation is easing from the peak deficit of Rs1.8 tn in
December 2010, we believe that 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 about 1% recently.
LICHF has been passing on rise in borrowings cost. LICHF has passed on the rise by
raising lending rates by 50 bps for existing customers from October 2010 followed by
another PLR hike of 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.
Asset re-pricing comfortable. LICHF has loan liabilities of about Rs170 bn which will likely
be due for re-pricing in FY2012E; this compares with interest rate sensitive assets of about
Rs300 bn. Thus, the company can maintain its margins if it can pass on about 50 bps rise in
interest rate in a scenario of 1% rise in borrowings cost. We continue to assume about 15
bps decline in NIM for FY2012E on the back of competitive intensity in the sector.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
LIC Housing Finance (LICHF)
Banks/Financial Institutions
Core performance remains strong. LIC Housing Finance reported PAT of Rs2.13 bn,
up 39% yoy but 8% below estimates. Core earnings (up 52% yoy and 9% ahead of
estimates) were driven by strong loan growth (36%) and higher NIM. Large capital
gains and standard asset provisions distorted reported earnings. LICHF’s retail business
continues to grow briskly even as the developer lending has taken a pause. We expect
earnings traction to continue despite margin pressure in the current environment.
Valuations remain inexpensive, we tweak estimates, retain ADD and target of Rs206.
Strong operational performance
LIC Housing Finance (LICHF) maintained its growth traction during 3QFY11—core PBT (PBT
excluding extraordinary items, provisions and capital gains) was up 52% yoy and 9% above
estimates at Rs3.5 bn. Retail disbursements were up 40% to Rs42 bn driving 36% loan growth.
We expect loan growth to remain strong at 34% yoy in March 2011E which will likely moderate to
28% by March 2012E.
LICHF’s NIM expanded to 3.15% from 2.93% in 2QFY11. Reported spreads declined marginally to
2.08% in 3QFY11 from 2.12% in 2QFY11. The difference in basis for calculation of NIM and
spreads largely explains the rise in NIM despite a decline in reported spreads—LICHF’s
management has highlighted that the borrowing cost considered in calculation of spreads is the
borrowing cost on the last day of the quarter while NIM is based on average loan book.
Developer loans take a pause
Post the bribes-for-loan scam, LICHF has paused approvals for developer loans. The company
continues to disburse loans approved in the past though it has not sanctioned any fresh proposals.
Consequently, approvals to developer loans declined sharply to Rs4.8 bn from Rs17.2 bn in
3QFY10 and marginal spreads declined qoq to 1.65% from 2.12%.
The management has 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 recommence their
developer loan business shortly. We understand from market sources that developers are finding it
challenging to raise bank loans post the bribes-for-loan scam and general tight liquidity in the
system. Consequently, the interest rates for developer loans will likely remain buoyant ; this will
augur well for margins of housing finance companies.
Extraordinary items tamper reported earnings
LICHF’s 3QFY11 earnings were affected by two major one-off items
Income from stake sale in mutual fund business. LICHF sold 17% stake in LIC Mutual Fund to
Nomura for a consideration of Rs1.36 bn. While the deal was announced a couple of quarters
back, the transaction was concluded in the previous quarter.
Provision on standard assets. LICHF has dual rate home loans of Rs160 bn (including 5-
year fixed rate loan of Rs50 bn). According to the recent NHB regulation, housing finance
companies need to make a standard asset provision of 2% on ‘teaser loans’ (dual rate home
loans). LICHF is not clear if 5-year fixed rate loans will quality to be ‘teaser loans’. Currently,
the company has made provisions of Rs3.2 bn for the entire outstanding dual rate home
loan portfolio (including 5-year fixed rate home loans)—the company has utilized excess
provisions of Rs0.99 bn while the balance (Rs2.2 bn) was reflected in the provision cost for
the quarter.
The management proposes to seek clarification from NHB on the definition on ‘teaser loan’.
In case the 5-year fixed rate home loans are considered as a ‘teaser loans’, the management
will need to review its business strategy.
Slippage ratio increased to 0.28% in 3QFY11 from 0.14% in 2QFY11 but gross NPL ratio at
0.7% and net NPL ratio at 0.2% was stable qoq.
Risk to margins for bulk borrowers, some buffers with LICHF
Pressure on liquidity. We believe that the current scenario poses risk on the near-term
margins of NBFCs. While the situation is easing from the peak deficit of Rs1.8 tn in
December 2010, we believe that 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 about 1% recently.
LICHF has been passing on rise in borrowings cost. LICHF has passed on the rise by
raising lending rates by 50 bps for existing customers from October 2010 followed by
another PLR hike of 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.
Asset re-pricing comfortable. LICHF has loan liabilities of about Rs170 bn which will likely
be due for re-pricing in FY2012E; this compares with interest rate sensitive assets of about
Rs300 bn. Thus, the company can maintain its margins if it can pass on about 50 bps rise in
interest rate in a scenario of 1% rise in borrowings cost. We continue to assume about 15
bps decline in NIM for FY2012E on the back of competitive intensity in the sector.
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