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Grabbing market share; low buffer keeps us guarded

LIC Housing Finance’s (LICHF) Q3FY21 earnings were characterised by stupendous uptick in home loan disbursements (up 36%YoY/40% QoQ) grabbing the market share. Muted credit cost at a mere 35/22bps in Q3FY21/9MFY21 (hardly any contingency buffer) aids the beat on PAT of Rs7.9bn. Nonetheless, undisclosed pro forma stage-3, lack of clarity on restructuring quantum, provisions of 1.3% on stress pool (stage-1/2 assets) of 9.6% pose risk to earnings volatility from incremental stress. As growth gains precedence over margins, NIMs are likely to stay flat despite significant funding cost benefit. Sustenance of gained traction driving loan growth to >10% by FY22E would only advance the fund raising need. Maintain ADD with a revised target price of Rs420 (earlier Rs338, assigning 1x FY23E ABV). Key risks: 1) stress resolutions in developer loan portfolio; 2) credit cost sustaining at recent past averages of <40bps against our estimate of 60-80bps.

* Provisioning buffer is currently meagre on rising stress pool, catch-up likely: Relatively meagre level of covid buffer + impairment provision (on estimated pro forma stage-3) at <20bps (Rs4bn) of AUM resulted in truncated credit cost in 9MFY21 at 22bps (annualised). Management indicated pro forma stage-3 as another 100bps over reported stage-3 of 2.68% and anticipated restructuring (though not much clarity) to be another 50-100bps. Compared to pre-covid average of stage-2 + stage-3 assets at 7.5% (5%+2.5%), the stress pool currently is 9.63% (6.95%+2.68%). Against this, it hardly carries 1.3% provisioning buffer that poses the risk of credit cost being deferred to Q4FY21/FY22. The offset here can be a successful resolution of long pending developer book stress cases (through Swamih funding or alternative routes of JDA).

* Grabbing market share; low rate home loans did the trick: The company is changing gears towards high growth path through competitive rate offerings. There was stupendous uptick in home loan disbursements (up 36%YoY/40% QoQ). Few specific nuances lend comfort on sustainability and better risk profile: 1) Typical profile is superior quality customer in prime CIBIL score; 2) affordable housing constitute 30% of incremental disbursement; 3) key markets of dominance demonstrates record property registrations; 4) balance transfer (in) cases being <5%; more organically sourced origination; 5) new innovative launches – Griha Varishtha and digitisation aids growth. It continues to be relatively cautious on LAP / developer loans. Loan growth picked up traction to 7% YoY (from 5%), enhancing the visibility towards >10% for FY22E.

* Growth precedes margins; NIMs improvement missing: Decline in funding cost of >35bps QoQ/>70bps YoY did not add to meaningful rise in NIMs, which were up 2bps QoQ to 2.36%. This seems to be lower when seen in conjunction with pro forma slippages not recognised and interest not reversed on the same. Slippages, restructuring and asset quality behaviour (be it recognition or resolution) will keep NIMs volatile. We believe benefits of lower borrowing cost will be passed on to prime customers for growth and NIM improvement will be limited.

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