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A mixed bag as earnings beat, but yields decline; asset quality deterioration needs explanation

* LICHF reported a PAT of INR9.25b (~18% beat), up 5x YoY, but down 17% QoQ, led by contained operating expenses (CIR of ~12%) and lower than estimated credit costs of INR3.1b (est. INR4.5b).

* Asset quality exhibited deterioration, with GS3/NS3 increasing by ~30bp QoQ each to 5%/3%. This can perhaps be explained by slippages from the restructured pool, which led to a cumulative increase of ~INR34b in the 30+dpd pool. This was accompanied by an increase of ~24bp in COVIDrelated provisions to INR6.2b (PQ: INR3b).

* Reported yields declined by 30bp QoQ as of Jun’22. NIM declined by 10bp QoQ to ~2.55% in 1QFY23. Core spreads also declined by ~12bp QoQ to 1.8%, driven by lower yields, while CoF remained stable sequentially.

Healthy growth in disbursements

* Disbursements in Individual Home loans grew 72% YoY and non-Housing Individual/Commercial disbursements grew 130%. Builder/Project loan disbursements grew 30% YoY. Total disbursements grew 76% YoY

* Total loan-to-book ratio grew by ~10% YoY and 2% QoQ. Home loans grew 15% YoY and 3% QoQ, while both LAP and Developer loans continued to decline.

Asset quality deteriorated; increase in management overlay

* The Stage 2 and 3 book grew by ~120bp QoQ, indicative of slippages from the restructured pool of advances. PCR on S3 declined by 260bp QoQ to ~41%. Volatility in PCR across Stage 1 and 2 loans continued.

* ECL provisions for assets re-categorized as NPA, as per the RBI circular, and those classified under Stage 1 and 2 stood at INR1.5b (PQ: INR2.3b).

Valuation and view

* The management’s explanation on the decline in yields and the deterioration in asset quality will be important from an investor perspective. Its NIM trajectory in FY23 will be important in a rising interest rate environment. It will be interesting to understand whether there were any resolutions in the Developer loan book and the levels of credit costs that the management now expects from FY23. We will look to revise our estimates after the earnings call on 5 th Aug’22.

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