LIC Housing Finance: Strong performance drives earnings:: Kotak Securities

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LIC Housing Finance (LICHF)

Banks/Financial Institutions

Strong performance drives earnings. LICHF reported PAT of Rs3.15 bn, up 47% yoy

on the back of strong loan growth (34%), stable yoy NIM and one-time capital gains.

Core earnings were up 30% yoy, 14% ahead of estimates. NPLs declined to historic

lows (net NPLs at 0.03%). We revise up estimates by 4-5%, retain ADD with rollover

price target to FY2013E to Rs270 (Rs240 earlier). Proposed modification of Advantage-5

(LICHF’s largest selling home loan product) will have high sensitivity to its near-term

business traction.

Loan growth – still going strong

􀁠 Strong traction in disbursements. LICHF reported loan growth of 34% in 4QFY11—up 1%

above estimates. Approvals were up 25% yoy; disbursements in the individual segments moved

up to 70% from about 40% in 3QFY11. The company proposes to resume disbursements to

builder loan segment in next few months.

􀁠 Advantage 5 = Advantage LICHF. LICHF’s 5-year fixed rate product (Advantage 5) has driven

almost 90% retail disbursements in 4QFY11. Fixed interest rate for next five years has likely

appealed to borrowers and hence driven high volumes for LICHF, in our view. While HDFC and

ICICI Bank offered floating rate home loans at 10%, LICHF’s ‘Advantage 5’ is priced at 10.15%.

Somewhat higher interest rate on this product has also buoyed yields for LICHF.

􀁠 New product expected shortly. LICHF now proposes to review ‘Advantage 5’. Risk of 2%

standard asset provisions (i.e. reckoning this product as a teaser loan) and higher share (close to

20%) in LICHF’s loan portfolio has likely prompted the management to review this product. A

modified product will be announced in the first week of May. The competitiveness of the

revised product will have high sensitivity on growth and margins of LICHF. SBI’s recent proposal

to withdraw its teaser loan product will likely ease competitive pressures in the industry and is a

comforting factor.

􀁠 Revising growth estimates. We expect LICHF to deliver 29% and 26% housing loan growth

in FY2012E and FY2013E as compared to 33% and 37% in FY2011E and FY2010, respectively.

We are modeling 20% (up from 15% earlier) disbursements growth in FY2012E and 15% in

FY2013E.

LICHF reported strong margins

LICHF reported NIM of 3.45% on the back of spread of 2.61% as compared to reported

(and restated) spread of 2.38% in 3QFY11. Re-pricing of loans (due to rise in PLR) has driven

asset yield (10.62% versus 10.35% in 3QFY11).

􀁠 Borrowings cost rise to be reflected in next 1-2 quarters. LICHF’s borrowings cost

was almost flat qoq 8.01% versus 7.97% in 3QFY11. Management has highlighted that

re-pricing of some of its high cost borrowings has supported the borrowings cost during

the quarter. The hike in bank PLR and rise in interest rates in the system was reflected

towards the end of the quarter—the weighted average borrowings cost on outstanding

borrowings as on March 2011 was higher at 8.64%. Incremental borrowings cost is in

the range of 9-9.5%; as such we expect borrowings cost rise to be reflected in next 1-2

quarters. LICHF has raised its PLR by 25 bps in April 2011; this will be somewhat offset

the rise in borrowings cost.

􀁠 NIM will likely be moderate. We expect LICHF’s margins to moderate to 2.9% in

FY2012E and 2.7% in FY2013E from about 3.1% in FY2011 on the back of rising bulk

borrowings rates in the system and proposed modification of ‘Advantage 5’. The

positioning of its revised ‘Advantage 5’ product will have a major sensitivity to our

analysis.

􀁠 Lending to developers can provide some buffer to margins. LICHF has resumed

lending to developers during the quarter. The share of developer loans in the entire

portfolio is now down to 8%; the company proposes to increase the share to developer

loans to 10-11% in FY2012E. Over a longer term, LICHF’s management is comfortable to

increase the share of developer loans to 15-20%.

Asset quality at its best

LICHF reported gross NPL of 0.5% as compared to 0.7% in March 2010; net NPLs declined

to 0.03% as from 0.1% in March 2010.

Impending risk of provisions for fixed rate loans

LICHF has fixed rate retail home loans of Rs210 bn which include Rs120 bn of fix-o-floaty (1-

year fixed rate product) and Rs90 bn of ‘Advantage 5’ i.e. 5 year fixed rate loan. In 3QFY11,

LICHF made standard asset provisions (@2% as applicable on teaser loans) on its entire fixed

rate retail home loan portfolio; these provisions were offset by capital gains from stake sale

in LIC Mutual Fund during the quarter. Management has highlighted that they are not clear

if ‘Advantage 5’ would be reckoned as teaser loans.

LICHF has however not made any standard asset provisions on ‘Advantage 5’ during

4QFY11. We estimate the standard asset provisioning requirement (in case ‘Advantage 5’ is

considered to be a teaser) at Rs1.2-1.3 bn. The company has excess provisions of Rs1.2 bn

on its balance sheet which can be utilized, in this case.

Gains from investments in real estate fund

LICHF has invested Rs500 mn in Kotak Real Estate Fund. The fund recently sold one of its

properties in Mumbai at ~300% gain. LICHF has recognized capital gains of Rs330 mn on

the back of this transaction.

Retain ADD with price target of Rs270

We are raising our estimates by 4-5% to factor higher margins and fees income. We expect

LICHF to deliver about 21-23% core earnings growth and about RoE of 23-25% over next

two years. We are revising our price target to Rs270 (from Rs240), retain ADD rating. At our

price target, the stock will trade at 12.1X PER and 2.58X PBR FY2012E and 9.8X PER and

2.15X PBR FY2013E.