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LIC Housing Finance
H ealthy growth but NIM under pressure
Event: management meeting, updates on the latest business trends
Key highlights from our meeting with LIC Housing Finance (LICHF)
management: 1) loan growth healthy at 29-30%, with retail disbursements growing
20-25% during Q2 FY12, disbursements to developers still sluggish; 2) NIM likely
to contract by 15-20bps QoQ from 2.8% in Q1FY12; 3) asset quality to recover
from a seasonally weak Q1; 4) LICHF is still awaiting clarifications from NHB on
standard asset provisioning of 40bps on retail loans; pending clarification it will
take a P&L hit of ~ Rs450m in Q2 or Q3FY12.
Impact: lower FY12 earnings estimate by 5%
Incorporating lower NIM and one-off provisions of Rs450m, we lower our FY12
EPS estimate by 5%. Our FY13 numbers are largely unchanged. We build in 20%
growth in individual disbursements which drives 27% growth in loan in FY12E.
We build in a 30bps decline in NIM to 2.7% in FY12E versus 3.0% in FY11.
Action: maintain Sell rating; rising headwinds not fully priced in
In our view, rising headwinds in the form of rising competition, probable
regulatory changes, low Tier-1, low provisions for operating profit ,and slowdown
in real estate activity tilt the risk-reward unfavourably considering the valuation of
2.2x FY12E book. The stock has outperformed the broader market/Bankex by 20%
/ 25% over the past six months. We reiterate our Sell rating with a price target of
Rs200
Valuation: Sell rating and price target of Rs200
We value the stock using a residual income method. Our price target of Rs200
implies 1.9x FY12E book and 8x FY12E earnings.
Rising headwinds not priced in
In our view, the stock is not fully pricing in some of the risks that we list below:
1) Risks of regulatory changes: recent media reports have suggested
removal of foreclosure and pre-payment charges on mortgages. While
the direct impact on revenue for LICH would be minimal as it has not
included pre-payment charges for most of its recent products, it could
lead to higher competitive intensity from banks as customers become
more price-sensitive. Capital requirements and availability of priority
sector funding for HFCs continue to be the same while it has become
much more stringent for NBFCs.
2) Rising competition from banks: historically, sluggish corporate credit
demand has been accompanied by an increase in competition from
banks. While SBI has withdrawn its teaser product, its floating home
loan continues to remain competitively priced.
3) Low Tier-1 ratio: its tier -1 ratio is ~9% with a leverage ratio of 12x.
We expect the company to look at raising equity capital over the next 6-
9 months especially considering the current growth rates.
4) We see risks on FY13 growth estimates as higher interest rates, removal
of dual rate schemes (at lower rates), and weaker demand (from
Mumbai and Gurgaon) could impact the current growth momentum.
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.
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 the company’s strategy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
LIC Housing Finance
H ealthy growth but NIM under pressure
Event: management meeting, updates on the latest business trends
Key highlights from our meeting with LIC Housing Finance (LICHF)
management: 1) loan growth healthy at 29-30%, with retail disbursements growing
20-25% during Q2 FY12, disbursements to developers still sluggish; 2) NIM likely
to contract by 15-20bps QoQ from 2.8% in Q1FY12; 3) asset quality to recover
from a seasonally weak Q1; 4) LICHF is still awaiting clarifications from NHB on
standard asset provisioning of 40bps on retail loans; pending clarification it will
take a P&L hit of ~ Rs450m in Q2 or Q3FY12.
Impact: lower FY12 earnings estimate by 5%
Incorporating lower NIM and one-off provisions of Rs450m, we lower our FY12
EPS estimate by 5%. Our FY13 numbers are largely unchanged. We build in 20%
growth in individual disbursements which drives 27% growth in loan in FY12E.
We build in a 30bps decline in NIM to 2.7% in FY12E versus 3.0% in FY11.
Action: maintain Sell rating; rising headwinds not fully priced in
In our view, rising headwinds in the form of rising competition, probable
regulatory changes, low Tier-1, low provisions for operating profit ,and slowdown
in real estate activity tilt the risk-reward unfavourably considering the valuation of
2.2x FY12E book. The stock has outperformed the broader market/Bankex by 20%
/ 25% over the past six months. We reiterate our Sell rating with a price target of
Rs200
Valuation: Sell rating and price target of Rs200
We value the stock using a residual income method. Our price target of Rs200
implies 1.9x FY12E book and 8x FY12E earnings.
Rising headwinds not priced in
In our view, the stock is not fully pricing in some of the risks that we list below:
1) Risks of regulatory changes: recent media reports have suggested
removal of foreclosure and pre-payment charges on mortgages. While
the direct impact on revenue for LICH would be minimal as it has not
included pre-payment charges for most of its recent products, it could
lead to higher competitive intensity from banks as customers become
more price-sensitive. Capital requirements and availability of priority
sector funding for HFCs continue to be the same while it has become
much more stringent for NBFCs.
2) Rising competition from banks: historically, sluggish corporate credit
demand has been accompanied by an increase in competition from
banks. While SBI has withdrawn its teaser product, its floating home
loan continues to remain competitively priced.
3) Low Tier-1 ratio: its tier -1 ratio is ~9% with a leverage ratio of 12x.
We expect the company to look at raising equity capital over the next 6-
9 months especially considering the current growth rates.
4) We see risks on FY13 growth estimates as higher interest rates, removal
of dual rate schemes (at lower rates), and weaker demand (from
Mumbai and Gurgaon) could impact the current growth momentum.
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.
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 the company’s strategy.
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