LIC Housing Finance - Raising Estimates to Factor In Better Capital Position :: Morgan Stanley Research

F13 Tier I ratio was above the 10.7% reported as of
Sep-12 and our estimate. Lower risk weights
announced by the RBI (NHB should follow) will raise
Tier I ~40 bps more and lower capital consumption
structurally. Raising EPS estimates and TP; we no
longer assume capital raising in F2014.
F13 Tier I ratio was 11.5% according to the recently
published annual report, above our estimate: The last
reported Tier I ratio based on audited accounts as of
Sep-12, was 10.7% (lower than 11% as of Mar-12). RWA
grew 11.5% between Mar-12 and Sep-12 – faster than
loans at 9.5%. We estimated F2013 Tier I ratio at 10.1%,
accounting for dividends and RWA growth in line with
loan growth. However, RWA declined 2% from Sep-12 to
Mar-13 (based on F2013 annual report data). Likely
reasons are a high proportion of loans qualifying for lower
risk weights after repayments during the year,
cancellations of sanctions not utilized (usually beyond 90
days), and other potential capital efficiency measures.
We no longer assume capital raising in our F14 base
case: The company may still decide to raise capital, as
suggested on past conference calls. However, the 11.5%
Tier I ratio is now healthy. Also, assuming the NHB lowers
risk weights in line with the RBI, Tier I could rise 40 bps
and capital consumption will be lower structurally on
individual mortgages > Rs0.2mn up to Rs0.75mn.
Raising EPS estimates, TP by 3% to account for no
dilution in F14; maintain OW: We continue to like the
retail mortgage segment. Despite investor concerns
about developer asset quality, valuation (9.0x F14e P/E,
1.6x BV) is attractive vs. 27% EPS CAGR in F13-15e.

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Target Price Discussion
We arrive at our price target of Rs335 per share (up 3% from
Rs325) using a probability-weighted residual income model,
with three phases: a five-year period of high growth, a 10-year
transition period, followed by a terminal growth period. We use
a cost of equity of 13.75%, derived by applying a risk free rate
of 7.85% (10 year govt. bond yield), beta of 1.1 and market risk
premium of 5.5%.
Our probability weightings remain unchanged. We assign a
probability weighting of 65% to our base case, 25% to our bull
case and 10% to the bear case. Our bull case reflects the
strong positioning of retail lenders relative to banks in terms of
capital, asset quality and impending regulatory changes,
thereby catalyzing strong volume growth and margin
expansion and hence revenue growth (30%+) over the next
couple of years. Our bear case reflects the tail risks of a deep
economic slowdown resulting in higher than expected
delinquencies in the developer loan book and also in retail
mortgages (following job losses).
We are raising our price target by 3% mainly to reflect changes
to our scenario values driven by higher EPS estimates. Our
F2014 / 15 / 16 EPS estimates are now higher by 3% each. We
no longer assume dilution – i.e., equity issuance – during
F2014 given
a) Higher starting point of Tier I ratio at 11.5% (as reported
recently in the annual report) – much higher than our
expectations and the last reported Tier I ratio of 10.7% as
of Sep-12.
b) Tier I capital ratio is likely to increase further by ~40 bps
(on our computations). Capital consumption is thus likely
to decrease, assuming the NHB follows up with guidelines
on revised risk weights (lower) for residential mortgages
and commercial real estate linked to housing (the RBI
announced these guidelines applicable to banks recently).
Changes to our scenario values are as follows:
Base Case: Rs295 (up 4% from Rs285)
Bear Case: Rs200 (up 3% from Rs195)
Bull Case: Rs490 (up 3% from Rs475)