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LIC HOUSING FINANCE
Provisioning dents earnings; investment profits provide support
LIC Housing Finance (LICHF) reported PAT of INR 2.13 bn in Q3FY11, growth of 39%
Y-o-Y and decline of 9% Q-o-Q. However, this included INR 1.37 bn of profit on sale
of stake in LIC MF to Nomura, which was used to offset provisioning of INR 2.3 bn on
fixed-cum-floating loans (as required by NHB). Core net interest income growth was
strong at 54% Y-o-Y (ahead of expectations) as reported margins improved 20bps Qo-
Q to 3.14% and loan growth was sustained at 36%.
Disbursements: Project loans slow down; individual loans strong
LICHF’s disbursements grew 28% Y-o-Y led by 41% Y-o-Y rise in individual loan
disbursements. As anticipated, CBI investigation and change in management
have pushed back growth in the corporate developer segment (to INR 4 bn). We
believe conservative/cautious stance on corporate developer loans will continue
for a while. We await indication from the management with respect to
continuance of Advantage 5 scheme considering NHB’s stringent provisioning
norms of 2% on special schemes and most players having withdrawn their
special schemes. However, we expect growth in the individual loan segment to
continue at 25% and expect disbursements to post 22% CAGR over FY10-12E.
Margins have peaked; provisioning will be key monitorable
The company reported margin expansion of 20bps Q-o-Q to 3.14% in Q3FY11.
The quarter saw full benefit of hike in lending rates and lending to corporate
developers in the last fortnight of September. Cost of funds also increased 20bps
and reported spreads were sustained at 2.1%. While the spree of rate hikes
continues with another 50bps hike in PLR effective January 1, 2011, we believe
relatively higher funding cost, lower disbursements in high yielding project loans,
and increased competition will put pressure on spreads. We expect NIMs to come
off to 3% in FY11E and are building in further compression in margins for FY12.
The company provided INR 2.34 bn on account of NHB norms on standard asset
provisioning on loans under special schemes @ 2% (after utilizing INR 1 bn of
excess provisioning). We are increasing our provisioning estimates upwards for
LICHF to factor in the same going forward as well.
Outlook and valuations: Earnings vulnerable; maintain ‘REDUCE’
While core NII performance was strong in Q3FY11, we believe margins have
peaked at 3.14% (also reflected in lower incremental spreads). Disbursement
growth is expected to cool off to 25% (from 35% in 9mFY11). Moreover, risk to
provisioning estimates will continue—incrementally, it will have to make
provisions on special loans through P&L and whether NHB follows RBI’s footstep
with respect to 0.25% general provisioning on standard asset will be key
monitorable. While we expect PAT CAGR of 19% over FY11-13E (on lower base
in FY11), RoEs are expected to sustain near ~22%. The stock is currently trading
at ~1.7x FY12E book and 8.3x earnings. We maintain our ‘REDUCE/Sector
Underperformer’ recommendation/rating on the stock.
Disbursements: Project loans slow down; individual loans strong
• LICHF’s disbursements grew 28% Y-o-Y to INR 46.2 bn in Q3FY11. Disbursements in
the individual loan segment contributed substantially to the overall growth rate,
clocking 41% Y-o-Y rise to INR 42 bn in line with our expectations. We believe
‘Advantage 5’ (fixed rate for five years) scheme continued traction as the company
is amongst few players offering fixed rate for five years giving it a competitive edge.
Management indicated that substantial portion of incremental disbursements have
been under Advantage 5 scheme.
• As anticipated, CBI investigation and change in management have pushed back
growth in high yielding corporate developer loans. Disbursements came in at INR 4
bn (compared to INR 16.6 bn in H1FY11 and INR 24 bn in FY10). We believe
incremental lending to this segment during the quarter was on back of sanctions
provided before CBI investigation hit the company in end November 2010. During
Q3FY11, sanctions declined 72% Y-o-Y to INR 4.8 bn. The project developer loan
book now stands at 10.5% of the total loan book, down from 11.3% in Q2FY11.
• We believe conservative/cautious stance on corporate developer loans is likely to
continue for a while. NHB has also made provisioning norms a bit stringent for
housing finance companies by requiring them to make standard asset provisioning of
2% on teaser loans and 0.4% on corporate loans. LICHF has not yet received
clarification from NHB whether its Fix-O-Floaty and Advantage 5 will be classified as
teaser loans. However, we await indication from the management with respect to
continuance of Advantage 5 scheme considering most players have withdrawn their
special home loan schemes. We are positive on growth trajectory and expect
traction in growth in the individual loan segment to continue at 25% and are
building in overall disbursement growth of 22% CAGR over FY10-12E.
Spreads inched up driven by rate hikes; sustainability key monitorable
• LICHF reported margin expansion of 20bps Q-o-Q to 3.14%. Q3FY11 saw full benefit
of hike in lending rates for existing borrowers by 50bps with effect from October 1,
2010, and also increase in the rates for Advantage 5 scheme. Moreover, benefit of
increased yield on lending to corporate developers in the last fortnight of September
was fully reflected in the quarter. At the same time, cost of funds also jumped 20bps
and reported spreads were sustained at 2.1%.
• The spree of rate hikes continues with another 50bps hike in PLR effective January 1,
2011. However, the company has indicated a decline in incremental yields to 9.9%
(as substantial disbursements have been under Advantage 5 scheme), down from
10.35% weighted average yields for 9mFY11. Also, the earlier skew in
disbursements towards the project developer segment, which supported yields, does
not seem to be a favourable proposition now.
• There are visible pressures on the financing front as well. Incrementally, LICHF is
raising funds at ~8.27%, whereas the weighted average incremental borrowing cost
for 9mFY10 was 8%. Incremental spreads for 9mFY11 have, therefore, come off to
1.65% against the book spread of 2.08%.
• Currently, 65% of its loan book is floating (except for loans under Fix-O-Floaty and
Advantage 5 scheme), while on the liability side ~60% is fixed.
• We expect NIMs to come off to 3% in FY11E and are building in further compression
in margins for FY12 considering the rising interest rate environment and competitive
loan schemes offered by peers as well.
Gross NPLs: Steadily on way to dip to 0.5% by FY11E end
• Following the historical trend, gross NPLs came off to 0.67% in Q3FY11 (from 0.74%
in Q2FY11) and net NPLs came off to 0.18% down from 0.21% on Q2FY11.
• The company provided INR 3.34 bn on account of NHB norms on provisioning on
standard assets under teaser/special rates schemes @ 2%. For this purpose, excess
provisioning of INR 1 bn was utilized and the rest was provided through P&L.
• We are increasing our provisioning estimates upwards for LICHF as incrementally it
will be required to make provisions on special loans through P&L in the absence of
any excess reserves (still clarification is pending from NHB whether Advantage 5 and
Fix-O-Floaty will be classified as teasers). Of the INR 463 bn outstanding loan book,
~35% falls under Advantage 5 and Fix-O-Floaty special rate schemes.
• Recently announced RBI guidelines on general provisioning for NBFCs is another key
area to monitor. It makes it mandatory to provide 0.25% on outstanding standard
assets. If NHB follows RBI’s footsteps and mandates similar provisioning, LICHF may
need to provide 0.25% on ~INR 250 bn worth standard assets excluding the INR 16
bn under special schemes and INR 50 bn under project developer loans.
• Management maintained its stance on improving gross NPLs further and bringing
them below FY10 levels of 0.69% by end of the current fiscal.
Company Description
LICHF is the fourth-largest mortgage finance company in India. It provides loans for
homes, construction activities, and corporate housing schemes. Almost 90% of the
company’s loans are to retail customers and the balance 10% to large ticket commercial
sector companies. It is fourth in terms of market share (including banks), with ~8-10%
market share in home loan disbursements in FY08. The company has loan outstanding
of INR 464 bn as at December 31, 2010. It has 130 offices and 100 camps across the
country. The company has a marketing network of over 6,000 direct sales agents, home
loan agents, and associates. LIC India is its majority shareholder with 36% equity
holding, followed by FIIs at 32%.
Investment Theme
While LICHF has been delivering core operating performance quarter after quarter, we
believe margins have peaked at 3.14% (also reflected in lower incremental spreads).
Disbursement growth is expected to cool off to 25%. Moreover, risk to provisioning
estimates will continue—incrementally, it will have to make provisions on special loans
through P&L and whether NHB follows RBI’s footstep with respect to 0.25% general
provisioning on standard asset will be key monitorable.
Key Risks
Continue the traction in individual and project loans also gains buoyancy.
Sustain effective pricing power and is able to pass on the pressure of increased funding
cost.
Asset quality continues to improve consistently and provisioning requirement is lower
due to discontinuance of special schemes.
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