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UBS Investment Research
LIC Housing Finance
Margins surprise
„ Revenues beat estimates on higher NIMs
LIC HF reported Net profit of Rs 2.13 bn slightly below our expectations of Rs
2.25 bn; however operating income of Rs 4.1 bn came in better than expected on
back of 20 bps improvement in NIMs. The company also fully provided for Rs 2.3
bn general provisions on teaser rate (announced late December) while it booked
income from sale of its stake in LIC MF to the tune of Rs 1.37 bn. Due to the
capital gains booked and provisioning expensed, the tax rate during the quarter also
came in lower than expected which too supported earnings.
„ Loan book grew 36%, Capital raising is likely imminent
Driven by disbursement growth of 28% Y/Y, loan book grew by 7% QoQ with 8%
growth in individual portfolio. Approvals too grew by 28%y/y with individual
approvals up 90% y/y. Project/developer loans have stayed flat. We estimate 27%
loan growth in FY12 following 30% growth in FY11; however with Tier-1 now at
8.5% we believe that capital raising will be required.
„ NIMs expand by 20 bps; likely at peak
LICHF hiked PLR by 50 bps in October which with favourable ALM has led to
NIM expansion of 20 bps QoQ to 3.1%. However the incremental spreads have
been correcting (down 30bps QoQ) and now is at 1.65% which in our view will
reflect in NIM with 2 quarter lag.
„ Valuation: Peak profitability; Maintain Sell
We believe profitability will be impacted by declining margins; also slowdown in
volumes (due to low affordability, high interest rates, competition) is a risk. Our
price target is derived using a residual income model
Q LIC Housing Finance
LIC Housing Finance Limited (LICHF) was established by LIC of India in June
1989 with the objective of providing long-term housing loans to individuals. It
was listed on the NSE in 1994. As at March 2010, LICHF had 181 marketing
offices and overseas representative offices in Dubai and Kuwait. It had 1,008
employees as of June 2010. During FY10, LICHF sanctioned loans amounting
to Rs180bn and disbursements worth Rs149bn. Its outstanding loan book stood
at Rs380bn in FY10. LIC holds 36.5% of shares outstanding and FIIs holds 32%
as at June 2010.
Q Statement of Risk
We believe a sustained economic slowdown could impact the banking and
finance sector on several fronts: lead to a slowdown in credit; increase NPL risk;
impact fee income; and exert pressure on NIMs We believe a slowdown in real
estate volumes and a spike in interest rates could impact mortgage demand. A
spike in interest rates and irrational competition will impact NIMs. A change in
management could lead to concerns on the continuity of LIC Housing Finance’s
strategy.
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