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LIC Housing Finance (LICHF)
Banks/Financial Institutions
Moderate performance. Lower disbursements and margin compression tampered
LICHF’s reported PAT (Rs2.56 bn) growth to 21% yoy, 4% above estimates. NPL
increased sharply qoq though the trend is largely seasonal. While we believe that
operating environment remains challenging due to high real estate prices driving down
demand, lower competitive intensity, likely toping-off of interest rates are positive
developments. We tweak estimates, retain ADD, with TP of Rs260 (from Rs270).
Loan growth moderates
Lower disbursements in 1QFY12. LICHF reported loan growth of 32% in 1QFY12 as
compared to 34% in 4QFY11.Disbursements in the individual segments moved up by 15% yoy;
LICHF made marginal disbursements to developers during the quarter.
Loan growth will likely remain strong. We believe that high real estate prices, seasonal
weakness in 1Q and withdrawal of ‘Advantage 5’ have affected growth traction. While high
real estate prices will likely continue to affect demand, traction will likely pick up over the year.
Management has highlighted that disbursements have picked up from June and is looking
forward to accelerate growth rates from 2QFY12E despite a higher base. We are reducing our
disbursements estimate for FY2012E to 15% from 20% earlier. Loan growth will likely be
strong at 27% in FY2012E (as compared to 29% assumed earlier). We are modeling 22% and
20% loan growth in FY2013E and FY2014E, respectively. The traction of disbursements over
the next few quarters will have a key sensitivity loan growth in the next two years.
Developer lending was lower than expected. Lending to developers was lower than
expected 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; however, they
remain cautious on the back of peaking real estate prices and the recent bribes-for-loan scam.
Withdrawal of Advantage 5 affected traction. LICHF had a stated policy to cap ‘Advantage
5’ to 20% of its loan book since the company did not have long-term fixed rate resources to
back this product. Interest rate risk on its balance sheet would have increased substantially, if
the company has extended the product. Thus, timely withdrawal of this product is positive, in
our view. However, this has affected business traction in 1QFY12. The product had driven
almost 90% retail disbursements in 2HFY11. Fixed interest rate for next five years (as offered in
this product) has likely appealed to borrowers and hence driven high volumes for LICHF.
We expect NIM to be stable
LICHF reported NIM of 2.8% as compared to 3.45% in 4QFY11 and 3% in 1QFY11. Spreads
declined to about 1.9% from 2.6% and 2.25%in 4QFY11 and 1QFY11, respectively. Sharp
rise in borrowings cost, increase in slippages has pulled down margins. LICHF raised lending
rated by 25 bps with effect from July 2011- this will cushion NIM in 2QFY12E. We expect
NIM to remain in 2.7-2.9% in the next quarter and continue to model 2.8% NIM for 2012E.
In our discussion, management highlighted that they find comfort from the following:
(Expectations of ) moderation in borrowings rates in 2HFY12
Progressive increase in share of developer loans (though this was below expectations this
quarter)
Lower competitive intensity
NPL rise sharply qoq, NPL ratio below 1%
LICHF reported gross NPL of 0.85% as compared to 0.5% in March 2011 and 0.9% in June
2011. In the past, the company has reported sharp qoq rise in NPLs in 1Q. The quantum of
qoq rise is higher this year likely due to lower base of 4QFY11. We have not found macro
signs of stress in retail home loans as real estate prices have remained stable; as such we
expect these NPLs to be akin to delinquencies. We model a decline in NPLs from 2QFY12E
though we believe that the extent of reduction will be crucial. Slippages in 1Q increased
provisions for the quarter (about Rs200 mn of Rs330 mn), we expect some reversal in this
over the next few quarters.
We are revising our provision estimates. Despite the rise in NPLs, we are reducing our
estimates for provisions to 0.23% of assets from 0.3% expected earlier.
According to news reports, NHB will likely impose standard asset provision of 0.4% for
housing finance companies. We are accordingly factoring 40 bps provisions for standard
assets in our provision estimate for FY2012E. The company has Rs1 bn of excess provisions
which can be utilized for these standard asset provisions. Notably, repayments from teaser
loans (carrying standard provisions @ 2%) will offset some of the incremental provisions.
The company has not made standard asset provision (@2%) on loans disbursed in 4QFY11
under the ‘Advantage 5’ scheme. LICHF is not clear if this product is a ‘teaser’ and is
awaiting regulatory clarification on the same. We are now not factoring any contingent
provision on this account.
Leverage at high levels, capital issuance likely in medium term
LICHF reported Tier-I capital adequacy ratio of 8.5% as of June 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
Moderate performance. Lower disbursements and margin compression tampered
LICHF’s reported PAT (Rs2.56 bn) growth to 21% yoy, 4% above estimates. NPL
increased sharply qoq though the trend is largely seasonal. While we believe that
operating environment remains challenging due to high real estate prices driving down
demand, lower competitive intensity, likely toping-off of interest rates are positive
developments. We tweak estimates, retain ADD, with TP of Rs260 (from Rs270).
Loan growth moderates
Lower disbursements in 1QFY12. LICHF reported loan growth of 32% in 1QFY12 as
compared to 34% in 4QFY11.Disbursements in the individual segments moved up by 15% yoy;
LICHF made marginal disbursements to developers during the quarter.
Loan growth will likely remain strong. We believe that high real estate prices, seasonal
weakness in 1Q and withdrawal of ‘Advantage 5’ have affected growth traction. While high
real estate prices will likely continue to affect demand, traction will likely pick up over the year.
Management has highlighted that disbursements have picked up from June and is looking
forward to accelerate growth rates from 2QFY12E despite a higher base. We are reducing our
disbursements estimate for FY2012E to 15% from 20% earlier. Loan growth will likely be
strong at 27% in FY2012E (as compared to 29% assumed earlier). We are modeling 22% and
20% loan growth in FY2013E and FY2014E, respectively. The traction of disbursements over
the next few quarters will have a key sensitivity loan growth in the next two years.
Developer lending was lower than expected. Lending to developers was lower than
expected 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; however, they
remain cautious on the back of peaking real estate prices and the recent bribes-for-loan scam.
Withdrawal of Advantage 5 affected traction. LICHF had a stated policy to cap ‘Advantage
5’ to 20% of its loan book since the company did not have long-term fixed rate resources to
back this product. Interest rate risk on its balance sheet would have increased substantially, if
the company has extended the product. Thus, timely withdrawal of this product is positive, in
our view. However, this has affected business traction in 1QFY12. The product had driven
almost 90% retail disbursements in 2HFY11. Fixed interest rate for next five years (as offered in
this product) has likely appealed to borrowers and hence driven high volumes for LICHF.
We expect NIM to be stable
LICHF reported NIM of 2.8% as compared to 3.45% in 4QFY11 and 3% in 1QFY11. Spreads
declined to about 1.9% from 2.6% and 2.25%in 4QFY11 and 1QFY11, respectively. Sharp
rise in borrowings cost, increase in slippages has pulled down margins. LICHF raised lending
rated by 25 bps with effect from July 2011- this will cushion NIM in 2QFY12E. We expect
NIM to remain in 2.7-2.9% in the next quarter and continue to model 2.8% NIM for 2012E.
In our discussion, management highlighted that they find comfort from the following:
(Expectations of ) moderation in borrowings rates in 2HFY12
Progressive increase in share of developer loans (though this was below expectations this
quarter)
Lower competitive intensity
NPL rise sharply qoq, NPL ratio below 1%
LICHF reported gross NPL of 0.85% as compared to 0.5% in March 2011 and 0.9% in June
2011. In the past, the company has reported sharp qoq rise in NPLs in 1Q. The quantum of
qoq rise is higher this year likely due to lower base of 4QFY11. We have not found macro
signs of stress in retail home loans as real estate prices have remained stable; as such we
expect these NPLs to be akin to delinquencies. We model a decline in NPLs from 2QFY12E
though we believe that the extent of reduction will be crucial. Slippages in 1Q increased
provisions for the quarter (about Rs200 mn of Rs330 mn), we expect some reversal in this
over the next few quarters.
We are revising our provision estimates. Despite the rise in NPLs, we are reducing our
estimates for provisions to 0.23% of assets from 0.3% expected earlier.
According to news reports, NHB will likely impose standard asset provision of 0.4% for
housing finance companies. We are accordingly factoring 40 bps provisions for standard
assets in our provision estimate for FY2012E. The company has Rs1 bn of excess provisions
which can be utilized for these standard asset provisions. Notably, repayments from teaser
loans (carrying standard provisions @ 2%) will offset some of the incremental provisions.
The company has not made standard asset provision (@2%) on loans disbursed in 4QFY11
under the ‘Advantage 5’ scheme. LICHF is not clear if this product is a ‘teaser’ and is
awaiting regulatory clarification on the same. We are now not factoring any contingent
provision on this account.
Leverage at high levels, capital issuance likely in medium term
LICHF reported Tier-I capital adequacy ratio of 8.5% as of June 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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