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LIC Housing Finance (LICHF)
Banks/Financial Institutions
Standard asset provisions and lower margins pull down profits. LIC Housing
Finance (LICHF) reported 10% yoy decline in core earnings on the back of lower
margins even as loan growth was strong at 29% yoy. The company made large
provisions for standard assets (without utilizing excess provisions on balance sheet) to
comply with the recent NHB regulation thereby pulling down reported earnings by 58%
yoy to Rs985 mn. NPLs declined 19% sequentially. We would seek more color on the
movement of provisions to revisit our estimates. Retain ADD with price target of Rs260.
Loan growth remains strong
Disbursements pick-up in 2QFY12. LICHF reported loan growth of 29% in 2QFY12 as
compared to 32% in 1QFY12 and 34% in 4QFY11.While loan growth moderated qoq,
disbursements growth (in retail business) increased to 24% yoy in 2QFY12 from 15% yoy in
1QFY12. We continue to model 27% loan overall growth (30% loan growth in retail business)
for FY2013E.
Developer lending was lower, as expected. Lending to developers was lower as the
company maintained its cautious stance in this segment. In the past, management had
highlighted that they propose to scale up in this segment; disbursements increased marginally
to Rs4 bn in 2QFY12 from Rs1 bn in 1QFY12.
We expect NIM to improve in 2H
LICHF reported NIM of 2.46% as compared to 2.78% in 1QFY12 and 2.93% in 2QFY11. Sharp
rise in borrowings cost which is gradually getting reflected in LICHF’s financials pulled down
margins. Notably, LICHF’s bank borrowings are linked to base rates; however, these loans are
typically reset once in a year- thus the impact of base rate hike in 4QFY11 and 1QFY12 is now
getting reflected in the financials of LICHF. The company has recently raised its benchmark lending
rate by 50 bps to pass-on the interest cost rise. With increasing dependence on bond markets,
stable interest rates in last few months and higher yields on the asset side, LICHF’s margins are
close to nadir. We expect NIM to be almost stable or improve marginally in 3QFY12E and further
rise in 4QFY12E.
NPLs decline after sharp qoq rise in 1QFY12
LICHF reported gross NPLs of 0.64% in September 2011 as compared to 0.85% in June
2011 and 0.74% in September 2010. NPL declined 19% qoq in after 84% rise in 1QFY12.
Typically, NPLs rise in 1Q and decline over the next three quarters. We have not found macro
signs of stress in retail home loans as real estate prices have remained stable; as such we
don’t expect any significant deterioration in NPL trends.
High standard asset provisions distort earnings
We would seek more clarity on management’s plans for utilization on excess provisions and
taxation for the quarter before revising our estimates.
During the quarter, NHB imposed standard asset provision of 0.4% on retail loans.
Consequently, LICHF made standard asset provisions of Rs2.05 bn in 2QFY12. The
company has not utilized excess provisions on its balance sheet (unlike previous guidance
and factored in our estimates). Hence, provision cost for the quarter was high at Rs2.04
bn as compared to Rs550 mn estimated by us.
LICHF has claimed tax benefit on these provisions – its overall tax rate was about 25%.
The 18-month fixed rate home loans (fix-o-floty) sold by LICHF in FY2011 will make a
transition to floating rate from July 2012E, thereby resetting provisions on these loans to
0.4% from 2% earlier; this will release provisions of about Rs2 bn.
Leverage at high levels, capital issuance likely in medium term
LICHF had Tier I capital adequacy ratio of about 8% as on September 2011. LICHF’s debt
equity ratio will likely cross 11.5X by March 2012E. This is close to historic peaks and the
company will need to raise equity capital to support medium-term growth. Management has
acknowledged the need to raise capital though there is no such proposal to the board at the
current juncture.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
LIC Housing Finance (LICHF)
Banks/Financial Institutions
Standard asset provisions and lower margins pull down profits. LIC Housing
Finance (LICHF) reported 10% yoy decline in core earnings on the back of lower
margins even as loan growth was strong at 29% yoy. The company made large
provisions for standard assets (without utilizing excess provisions on balance sheet) to
comply with the recent NHB regulation thereby pulling down reported earnings by 58%
yoy to Rs985 mn. NPLs declined 19% sequentially. We would seek more color on the
movement of provisions to revisit our estimates. Retain ADD with price target of Rs260.
Loan growth remains strong
Disbursements pick-up in 2QFY12. LICHF reported loan growth of 29% in 2QFY12 as
compared to 32% in 1QFY12 and 34% in 4QFY11.While loan growth moderated qoq,
disbursements growth (in retail business) increased to 24% yoy in 2QFY12 from 15% yoy in
1QFY12. We continue to model 27% loan overall growth (30% loan growth in retail business)
for FY2013E.
Developer lending was lower, as expected. Lending to developers was lower as the
company maintained its cautious stance in this segment. In the past, management had
highlighted that they propose to scale up in this segment; disbursements increased marginally
to Rs4 bn in 2QFY12 from Rs1 bn in 1QFY12.
We expect NIM to improve in 2H
LICHF reported NIM of 2.46% as compared to 2.78% in 1QFY12 and 2.93% in 2QFY11. Sharp
rise in borrowings cost which is gradually getting reflected in LICHF’s financials pulled down
margins. Notably, LICHF’s bank borrowings are linked to base rates; however, these loans are
typically reset once in a year- thus the impact of base rate hike in 4QFY11 and 1QFY12 is now
getting reflected in the financials of LICHF. The company has recently raised its benchmark lending
rate by 50 bps to pass-on the interest cost rise. With increasing dependence on bond markets,
stable interest rates in last few months and higher yields on the asset side, LICHF’s margins are
close to nadir. We expect NIM to be almost stable or improve marginally in 3QFY12E and further
rise in 4QFY12E.
NPLs decline after sharp qoq rise in 1QFY12
LICHF reported gross NPLs of 0.64% in September 2011 as compared to 0.85% in June
2011 and 0.74% in September 2010. NPL declined 19% qoq in after 84% rise in 1QFY12.
Typically, NPLs rise in 1Q and decline over the next three quarters. We have not found macro
signs of stress in retail home loans as real estate prices have remained stable; as such we
don’t expect any significant deterioration in NPL trends.
High standard asset provisions distort earnings
We would seek more clarity on management’s plans for utilization on excess provisions and
taxation for the quarter before revising our estimates.
During the quarter, NHB imposed standard asset provision of 0.4% on retail loans.
Consequently, LICHF made standard asset provisions of Rs2.05 bn in 2QFY12. The
company has not utilized excess provisions on its balance sheet (unlike previous guidance
and factored in our estimates). Hence, provision cost for the quarter was high at Rs2.04
bn as compared to Rs550 mn estimated by us.
LICHF has claimed tax benefit on these provisions – its overall tax rate was about 25%.
The 18-month fixed rate home loans (fix-o-floty) sold by LICHF in FY2011 will make a
transition to floating rate from July 2012E, thereby resetting provisions on these loans to
0.4% from 2% earlier; this will release provisions of about Rs2 bn.
Leverage at high levels, capital issuance likely in medium term
LICHF had Tier I capital adequacy ratio of about 8% as on September 2011. LICHF’s debt
equity ratio will likely cross 11.5X by March 2012E. This is close to historic peaks and the
company will need to raise equity capital to support medium-term growth. Management has
acknowledged the need to raise capital though there is no such proposal to the board at the
current juncture.
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