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Stupendous growth momentum; needs to shore up provisioning and capital buffer

LIC Housing Finance’s (LICHF) Q4FY21 earnings reflected catch-up on stress recognition, specific loan loss and covid provisioning leading to credit cost of 180bps (compared to 20bps in 9MFY21). We were factoring this in, though consensus was not, and earnings were in-line with our expectations but much below consensus. Second covid wave disruption will keep stress pool and credit cost elevated through FY22. Stupendous momentum in home loan disbursements continued - more than doubled YoY in Q4 with 18% growth for full year FY21 grabbing the market share. As highlighted by us earlier that sustenance of robust growth momentum and provisioning risk buffer would advance the fund raising need, the Board has approved preferential issue to LIC to shore up capital buffer by >150bps. Factoring in capital infusion, revised growth and credit quality outlook, we revise our target price to Rs543 (earlier: Rs420, assigning 1.1x FY23E ABV). Maintain ADD. Key risks: 1) Delayed resolution of developer portfolio stress; and 2) competitive pressure on NIMs.

* Stress recognition settles higher than expectations: Stage-3 assets have risen from 2.68% to 4.12% - of this individual home loan stage-3 has risen from 1.22% to 1.89% QoQ, individual non-home loan from 9%, while stress in developer portfolio rose marginally (16.2% to 18%). Stage-2 assets moderated a bit QoQ from 6.95% to 6.19%. Stage-1 assets, thereby, were down 70bps to 89.7%. It has restructured Rs30bn (1.3% of loans) of which Rs23.6bn (93 accounts) is in corporate developer segment (15% of the developer book). Stress recognition has settled higher than the management’s earlier indication of pro-forma stage-3 being another 100bps (over reported stage-3 of 2.68%) and anticipated restructuring clarity to be another 50-100bps. Due to disruption by second covid wave, we believe, stress pool and restructuring will further go up from FY21 levels. Collection efficiency has remained steady at 98% in March (98% in Dec). The management indicated that collection efficiency for standard pool has sustained around 98% in April as well as May.

* Provisioning catch-up visible for first covid wave disruption; second wave impact will reflect in FY22: True to our hypothesis that provisioning buffer of 1.3% seems meagre on stress pool (stage 2/3) at 9.63%, Q4FY21 witnessed a catch up on the same. It created incremental Rs3bn of covid buffer and Rs8bn of impairment provisioning. As against our expectations of Rs9bn of provisioning, it came in further higher at Rs9.8bn – 180bps credit cost compared to 20bps for 9MFY21. Compared to near zero provisioning on stage-1 and stage-2, it now carries provisioning of Rs1.54bn (6bps on stage-1 and 26bps on stage-2). It has also created incremental provisioning of Rs8.7bn towards stage-3 assets, though coverage on stage-3 is down QoQ from 50% to 40%. Besides this, Rs2.05bn has been transferred to impairment reserves as impairment allowance under Ind-AS is lower than IRAC provisioning requirement. Cumulatively, it suggests provisioning of 1.8% on overall stress pool of more than 10%. We expect requirement for higher provisioning in FY22 as well and are building in credit cost of 1.0%/0.7% for FY22/FY23E, respectively

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