LIC Housing Finance :Falling bond yields and improving project approvals to drive margin recovery in FY14: JPMorgan

We think LICHF’s net interest margins are poised for a recovery in FY14.
We believe this will be driven by sharply lower wholesale funding costs
and improving project approvals, resulting in a better share of higher
yield developer portfolio. LICHF also has a higher share of fixed floating
loans relative to peers, and hence on a relative basis benefits more. We
think incremental spreads for F14 will continue to be well above average
on book spread, resulting in higher NIM. Maintain Overweight.

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 Sharp reduction in wholesale yields augurs well for spread
improvement: There has been a sharp fall-off in the cost of funds across
tenors in the bond market. LICHF in turn has been able to raise
incremental borrowings at 8.3-8.4% rate vs average NCD cost of funds
on B/S of 9.4%. Liability repricing and incremental shift in borrowings
towards bonds should drive a reduction in liability costs through F14.
 Project approval environment is probably the best in the last three
years: This should then drive higher yield developer loans, which have
fallen to a six-year low of 3.4% and one of the key reasons impacting
margins for LICHF over the past two years. Incrementally, sanctions
have started to improve, but this has not translated into an improved mix
yet given heavy repayments. We note that incrementally there is better
discipline by lenders on cash flow management (i.e. escrows on project
cash flows) thus containing risks. The company’s target of increasing
higher yield LAP/ developer portfolio to 10% from ~6% currently,
though ambitious, is not implausible, given the low base. Legacy
portfolio where NPA is currently concentrated is running off and given
the sharp increase in land/ residential prices (2-3x) since 2008, we
expect a favorable eventual resolution over F14/15.
 Competition has limited headroom: Lower cost of funds is likely to at
some point result in lower mortgage rates from banks. However, we
think the competition is likely to remain sanguine given base-rate
constraints on banks (not there in earlier cycles), higher provisioning
requirements and better overall discipline within the industry. Further,
we note that LICHF is already one of the lowest cost mortgage providers
in the industry.