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LIC Housing Finance (Business as usual, valuations attractive, BUY):
Our recent interactions with management of LIC Housing Finance (LIC HF) indicate that the company is keeping its full-year loan growth guidance of 30% unchanged and business momentum remains strong. We expect the company to grow its disbursements and sanctions at 35% and 40% respectively in the coming quarter. With an RoE of 20%+ and a P/B of 1.6x on FY12ii, we believe the risk-reward is favourable. Even if newer provisioning norms (which the management feels should not be applicable on the ‘Fix-o-Floaty’ loans) were to apply, the estimated net impact would ~4.4% of FY12ii PAT. Also, tightening of rates is actually beneficial to LIC Housing Finance’s spreads, as gains on existing floating-rate loans supersede lower incremental margins on new teaser-rate loans. We retain our BUY recommendation.
Growth momentum persists: The company has kept its full-year loan
unchanged, which is a pointer to growth growth guidance of 30%
momentum remaining unabated. Total loans whose disbursal fairness is
ty is present) stand at Rs3.69bn, under question (although valid securi
which is less than 2% of the loan book size.
The National T Provisioning norm impact contained if applicable:
Housing Board (NHB) has mandated lenders to provide for 2% of all
loan the entire existing ‘Fix-o-Floaty’ outstanding teaser-rate loans. If
ion requirement is alify, the provis portfolio of Rs150bn is assumed to qu
about Rs3bn. The company has about Rs1.1bn of statutory reserves,
which it can offset against this. There is a one-time gain of Rs1.4bn on
the LIC mutual fund stake sale, which will provide further insulation. This
means the net impact is only about Rs0.5bn, or ~4.4% of FY12ii PAT.
‘Fix-o-Floaty’ loans incrementally much less profitable, having 60% of its
% on the lending side ensures that borrowings as fixed-rate vs only 35
there is a benefit on the existing portfolio. Our analysis shows possible
if hikes are passed on to existing impact of rate hikes on spreads:
borrowers, rate hikes will actually lead to slight margin expansion.
We expect 22-25% loan growth annually
s will continue to gain market We believe housing-finance companie
th for LIC Housing Finance in the share. We expect 22-25% loan grow
next three years. The company’s sanctions increased 43% in the last quarter and we expect a similar run rate to continue in this quarter.
Rate hikes – possible impact on margins are actually positive!
If we assume that hikes are passed on as far as existing floating-rate
lending is concerned, then the following analysis shows that rate hikes
are actually positive for margins.
…and margins have been healthy till 2QFY11
8bps QoQ to about 2.93%, they In 2QFY11, although NIMs were down
were up about 49bps on a YoY basis. The favourable YoY comparison
was because of a marked improvement in borrowing costs, while the
QoQ decline was on account of a small drop in yield on advances.
Incremental yield for the company was 10% for an incremental cost of
funds of 7.88%. The resulting incremental spread of 2.12% was a shade
higher than the company’s usual 2% target.
Provisioning norms are unlikely to have a large impact
NHB announced tighter prudential norms for housing loans, in line with
the announcement made by the RBI. These norms include capping LTV
ight of 125%, general provision of for loans below Rs2m at 90%, risk we
0.4% for builder/developer loans, and 2% provision on teaser loans for
are offered. If the entire existing the period during which teaser rates
‘Fix-o-Floaty’ loan portfolio is assumed to qualify, the provision
e company has about Rs1.1bn of requirement is about Rs3bn. Th
statutory reserves, which it can offset against this.
A study of LIC Housing Finance’s provisioning policy reveals that the
licy only in case of assets that company has changed its provisioning po
r which NHB (National Housing Bank) are not in default, a category fo
earlier required zero provisioning in case of retail home and project
stressed assets, the company holds its loans. Also, in all categories of di
provisioning norms at levels much higher than those prescribed by NHB.
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