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Earnings miss on lower margins and higher credit costs

* LIC Housing Finance (LICHF) reported Q2FY23 PAT of Rs3.05bn, much below consensus and our estimates, primarily driven by adverse asset-mix changes and higher-thanexpected opex and credit costs. Disbursements grew 10.4% QoQ/4.2% YoY, led by individual-loan disbursement growth of 24.7% sequentially. However, developer-loan disbursements saw a sharp decline of ~80% QoQ. AUM grew 2.6% QoQ/10.4% YoY. In terms of the asset mix, the share of LAP and developer book declined 30bps and 40bps QoQ. Calculated yields declined 50bps QoQ, despite transmission of the 60bps PLR hike from 1st July 2022. This was due to: 1) the Rs2.75bn modification-led NPV loss on conversion of Rs90bn of fixed-rate loans to floating rate in order to retain high quality customers. The yield discount availed by the customers at the time of conversion has been offset by the 175bps PLR hikes since June 2022, and 2) Rs0.95bn decline in interest income owing to repayment of higher yielding project loans and slippages from the book. Adjusted for one-offs, yield increased by 8bps QoQ. Calculated CoF rose by 30bps, in line with our estimates. As a result, calculated NIM declined 75bps QoQ to ~1.8% despite earlier management guidance pointing to stable or higher NIM sequentially. Opex grew by 28.6% QoQ, driven by higher employee benefit (+14.6% QoQ) and other expenses (+46.9% QoQ). Consequentially, PPOP came in at Rs9.44bn.

* While headline asset-quality numbers improved QoQ, with GS3 and NS3 declining 6bps and 20bps QoQ to 4.9% and 2.83%, respectively, credit costs increased 39bps sequentially to 0.87% due to a technical write-off of ~Rs1.9bn on 950 retail accounts that were fully provided for. During the quarter, Rs5.4bn worth of project loans slipped into stage 3; of these, Rs3.5bn was from the OTR pool, but were out of moratorium before Q2. The OTR book stood at ~Rs34.66bn, entirely in stage 2, with Individual loans at Rs13.74bn (Q1: Rs15.44bn) and project loans at Rs20.93bn (Q1: Rs20.24bn). Management believes that any more slippages from the restructured book would be limited. GS3 on individual loans stood at 3.15%, on core housing loans stood at 1.68%, on non-core individual loans at 6.85%, on commercial loans at 22.2% and on project loans at 42.2%. PCR on stage 3 assets stood at 43.7% (Q1FY23: 40.4%). PCR on stages 1 & 2 declined 6bps QoQ to 0.36%. ECL, as a % of overall loans, rose by ~8bps QoQ to 2.49%. COVID-related provisions stood at Rs5.355bn vs. Rs6.191bn in Q1FY23.

* Management guidance: i) Management expects margins for FY23 to be better than those in FY22. ii) Management expects to maintain the current PCR on standard assets. iii) CoFs are expected to rise by at least 15-18bps in Q3 due to the 50bps repo hike in Sep-22, while the 115bps PLR hike, effective 1-Oct-2022, is expected to translate into a 80-90bps rise in asset yields from Q3.

* We retain our BUY rating on the stock with Sep-23E TP of Rs450/share (earlier, Rs490), valuing the firm using the ‘excess return on equity’ (ERE) methodology. Our TP implies a Sep-24E P/BVPS of 0.8x. Key downside risks: Further asset quality weakening in the noncore housing loan and project loan segments. Conversion of the remaining 2% fixed loans into floating can result in a one-off negative surprise on asset yields.

* Changes in estimates: We factor-in the decline in project loan growth rate witnessed in Q2FY23 and revise downward our disbursement/AUM growth rates for FY23 to 13%/11.1% from 25%/12.5% earlier. Due to asset-mix changes, we cut our NII for FY23E/FY24E/FY25E by 4.8%/1.5%/2.4%, respectively. We factor-in the current elevated levels of operating expenses and revise up our Opex-to-AUM estimates. Credit costs for FY23E/24E/25E have been revised up, to average at 48bps from 36bps earlier.

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