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LIC Housing Finance
Ltd.
Good Numbers. Maintain EW
Quick Comment – LIC HF reported a profit of
Rs2.1bn (-9% QoQ and +39% YoY). There were some
one-offs during the quarter – hence if we look at
adjusted PBT it was at Rs3.5bn (+11% QoQ and +64%
YoY) and was ahead of our estimate of Rs3.3bn.
The following were the key points from the results:
a) Retail volume growth continued to be strong at 8%
QoQ and 33% YoY.
b) CRE loan book was flat QoQ (but up 68% YoY).
Incremental disbursements to this segment dropped to
Rs4.1bn from Rs12.8bn in previous quarter – potentially
impacted by the November 2010 events.
c) NIMs expanded 21 bps QoQ to 3.14% with increased
yields on the existing portfolio more than offsetting rising
funding costs and falling incremental spreads. As a
result, NII grew by 12% QoQ and 53% YoY.
d) LICHF has met its entire additional provisioning
requirement for teaser rate loans of Rs3.35bn by
utilizing Rs1bn from its existing excess reserves and
Rs2.35bn through the P&L account. The P&L hit was
buffered as they recorded Rs1.4bn as one-off income
from part sale of their stake in LIC Mutual Fund.
e) Headline asset quality trends registered improvement
with GNPLs falling 2% QoQ / 36% YoY.
f) Tier I ratio dropped to 8.5% (down 50 bps QoQ) – we
are awaiting clarification from management on the
reasons for the sharp fall.
Maintain EW: The margin improvement this quarter
was a positive. However, with incremental spreads in
the quarter running at sub-1% (impacted by rising
funding costs and falling CRE exposure) – we believe
that it will become increasingly difficult for LICHF to
protect margins by raising rates on existing customers.
LICHF is trading at 8.8x F12e earnings and 1.7x BV. We
believe that following the November 2010 events that the
scope for re-rating is low and hence we maintain our EW.
Adjusted NII grew by 12% QoQ and 53% YoY: Reported net
interest income grew by 15% QoQ and 54% YoY. Including
interest income from liquid mutual funds and bank fixed
deposits (which LICHF records under other income) – net
interest income was up 12% QoQ and 53% YoY. NII
progression was driven by both volume growth and margin
expansion.
Overall volume growth continued to be strong: The overall
loan book expanded by 7% QoQ and 36% YoY. This compares
with 8% QoQ and 36% YoY in the previous quarter.
Retail loan growth was robust….Individual loans expanded by
8% QoQ (+33% YoY). Incremental disbursements were up
10% QoQ and 41% YoY.
But CRE loan growth slowed down sharply during the
quarter… Outstanding CRE loan book was down 1% QoQ
(+68% YoY). Incremental disbursements to this segment
dipped to Rs4.1bn from Rs12.8bn in the previous quarter. We
highlight that quarterly disbursals to this segment have
historically been very volatile in nature (see Exhibit 3) – but
there is likely to have been a slowdown in lending to the
segment post the November 2010 events.
Reported margins expanded by 21 bps QoQ / 38 bps YoY
to 3.14%: At the start of the quarter, LICHF had effected a
prime-lending rate hike of 50 bps effective October 1 (which
was applicable on about 65% of their assets which are floating
rate in nature). This more than offset funding cost increases
(which happened through the quarter) and helped improve
margins at the portfolio level.
However, if we look at the incremental spreads, there is some
pressure starting to build up. Incremental spreads contracted
to 1.65% in F9M11 from 2.12% in F1H11 – implying a sharp fall
in incremental spreads in the QE December 2010 (0.71% on
our computations). We believe that this compression was
driven by a combination of: a) rising incremental funding costs
(moved up to 9.1% for QE December 2010 from 8.3% in the
previous quarter, on our computations); b) lower CRE
disbursements (which yield about 400 bps more than retail
loans).
So far, the company has been able to offset the fall in
incremental spread on its loan book by passing on funding cost
increases to its existing customers (by raising rates and
improving margins). LICHF has again raised its PLR on
individual mortgages by 50 bps on January 1, 2011. Also, it has
increased rates on the five-year fixed rate product by 50-85 bps.
We need to wait and watch to see if these increases are
enough to offset funding cost pressures in the coming quarter
as well.
We believe that the pressure is likely to continue to build given
that: a) system liquidity continues to be tight impacting
wholesale funded institutions; b) continued risk aversion could
lead to a further fall in higher yielding CRE loans as proportion
of total book (down 82 bps QoQ in QE-December 2010); c) with
every incremental quarter the incremental book (which is being
underwritten at lower spreads) – will begin to form a larger
proportion of its overall book.
Core non-interest income grew by 20% YoY but was flat
QoQ: Processing fees which is the key component with the
same grew by 8% YoY but was down 6% QoQ.
Cost to core income ratio was stable QoQ at 13.7%: Staff
costs were up 20% QoQ and 61% YoY. Other expenses
(commission and other expenses) moved up 7% QoQ and 20%
YoY.
LICHF recorded a provision write-back of Rs21mn. Asset
quality trends saw improvement with GNPLs falling 2% QoQ
and 36% YoY.
Reported Tier I ratio at 8.5%: The company reported a Tier I
of 8.5% (down 50 bps). While part of the decline in capital ratio
is likely driven by a combination of asset growth and higher risk
weights on high value loans – it seems sharper than
expectations. We expect to get further clarity on the same in
the company’s conference call scheduled for January 21, 2010
at 11 am (India time).
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