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ECL enhancement hide healthy operating performance

LIC Housing’s substantial earnings miss (PAT of Rs4.8bn v/x Rs7.9bn) was purely driven by buffer provisions made which was reflected in improvement of Stage-3 ECL coverage. NII and PPOP were 5% ahead of estimates, despite marginally lower than estimated loan growth (3% qoq/10% yoy), on full recovery of the NIM decline witnessed during Q2 FY23. Stage 2/3 assets were flat qoq in absolute terms, an improved trend versus H1 FY23, reflecting controlled flow fwd./slippages (stronger collections) from the restructured and current pools. Notably, there were no loan write-offs during the quarter.

Growth momentum impacted by rate hikes

Home Loans disbursements were down 4% qoq on the back of demand getting impacted from back-to-back significant rate hikes (resulting lower loan eligibility). A similar trend in disbursements was even witnessed by HDFC. Management expects disbursements performance to be much better in the current quarter on account of seasonal push. Lumpsum prepayment rate has been steady and BT Out has come down, which is attributable to increasing rate scenario and lower rate differential with banks. Pre-Covid, the company’s home loan portfolio was growing at 10-12% when rates were closer to current levels.

NIM nearly back to Q1 FY23 level; stable asset quality

NIM improved by 60 bps qoq to 2.4% on the back of 110 bps expansion in portfolio yield (benefits coming from 115 bps rate hikes announced during Q2). CoF increase was on expected lines at 30 bps qoq. Incremental CoF for the quarter was at 7.6% and Incremental Yield was 9%+. With further 35 bps rate hike coming into effect from Jan 1, the NIM is expected to be largely stable in Q4 FY23. Despite a strong asset quality performance and unchanged assessment of PD and LGD across portfolio buckets, the co. made significant prudential provisions to strengthen the balance sheet. ECL coverage on Stage-3 assets was raised to 50.9% (from 43.7%), while it marginally came-off on Stage-2 assets (from 7.2% to 6.4%). No further augmentation of ECL coverage is envisaged in coming quarters. Slippages from std. restructured pool have moderated, and about 15% of original OTR book (Rs71bn) has slipped so far (in line with management’s assessment). Strong collections trend underpins company’s expectation of future credit cost at 45-50 bps.

Incremental trends in growth and credit cost to be closely monitored

Our earnings estimates witness significant downgrades on accounting of higher provisions and moderation in loan growth. The ABV estimates don’t undergo material cuts as the prudential provisions lower the net Stage-3 assets. LIC HF’s performance in Q4 FY23 would be closely monitored for incremental trends in growth and credit cost. While the valuation is undemanding at 0.9x FY24 P/ABV, any incremental volatility in growth, margins or asset quality could cap the potential re-rating. Maintain BUY with 12m PT of Rs450.

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