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LIC Housing Finance
Strong historicals but incremental NIMs under pressure
We have an UNDERPERFORM rating and a one-year
price target of Rs175. The stock has outperformed the
Bankex since Nov ’10, with stronger-than-expected 3Q
FY11 earnings and the financial impact of the “bribe for
loans” case being negligible.
We see pressure on NIMs and RoAs in FY12E driven
by: 1) rising cost of funds; 2) declining contributions from
developer loans; 3) LICHF’s focus on fixed-rate home
loans in a rising rate environment, since these loans
form 70% of all new loans; 4) higher competition from
banks; and 5) possible deterioration of its developer
loan portfolio.
Strong historical financials – LICHF posted a robust
turnaround in financials in the period FY07-10, following a
revamped business strategy. Growth in home loan
disbursals revived to 42% over FY07-10 against a low 8%
over FY04-07. RoA improved to 1.9% in FY10 from 1.6% in
FY07 and gross NPLs declined to 0.69% in FY10 from
2.57% in FY07.
Incremental loan growth and NIMs under pressure –
However, we now expect a slowdown in earnings and loan
growth, driven by pressure on NIMs. We expect earnings
growth to slow to 16% in FY12 and to 17% in FY13, on
higher lending in fixed-rate home loans, higher cost of funds
and increased competition from banks. We see potential
dilution over the next 12 months, which would be earlier
than the street’s expectations.
Derating to be sustained – We expect LICHF to continue
to trade at lower-than-peak multiples as we expect growth
momentum to slow down. The average trading multiple is
1.5x in the last three years and 1.3x in the last five years.
For details, please read our initiation report on LIC Housing
dated 1 Apr ’11.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
LIC Housing Finance
Strong historicals but incremental NIMs under pressure
We have an UNDERPERFORM rating and a one-year
price target of Rs175. The stock has outperformed the
Bankex since Nov ’10, with stronger-than-expected 3Q
FY11 earnings and the financial impact of the “bribe for
loans” case being negligible.
We see pressure on NIMs and RoAs in FY12E driven
by: 1) rising cost of funds; 2) declining contributions from
developer loans; 3) LICHF’s focus on fixed-rate home
loans in a rising rate environment, since these loans
form 70% of all new loans; 4) higher competition from
banks; and 5) possible deterioration of its developer
loan portfolio.
Strong historical financials – LICHF posted a robust
turnaround in financials in the period FY07-10, following a
revamped business strategy. Growth in home loan
disbursals revived to 42% over FY07-10 against a low 8%
over FY04-07. RoA improved to 1.9% in FY10 from 1.6% in
FY07 and gross NPLs declined to 0.69% in FY10 from
2.57% in FY07.
Incremental loan growth and NIMs under pressure –
However, we now expect a slowdown in earnings and loan
growth, driven by pressure on NIMs. We expect earnings
growth to slow to 16% in FY12 and to 17% in FY13, on
higher lending in fixed-rate home loans, higher cost of funds
and increased competition from banks. We see potential
dilution over the next 12 months, which would be earlier
than the street’s expectations.
Derating to be sustained – We expect LICHF to continue
to trade at lower-than-peak multiples as we expect growth
momentum to slow down. The average trading multiple is
1.5x in the last three years and 1.3x in the last five years.
For details, please read our initiation report on LIC Housing
dated 1 Apr ’11.
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