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Positive surprise on NIM; disbursements growth was weak

LIC HF delivered substantial earnings beat (PAT of Rs11.8bn v/s est. Rs8bn) driven by sharp NIM expansion and lower provisions, while portfolio growth was in-line with expectation. The large sequential margin expansion of ~50 bps was caused by steep improvement in portfolio yield and measured increase in CoF. The lower credit cost was aided by reduction in Stage-3 assets (partly caused by collections & recoveries) and decrease in its coverage. Though home loan disbursements were weaker than expected (growth was weaker than peers too), the portfolio growth came in-line due to reduction in prepayments/BT Out

Comforting NIM outlook; volatility in asset quality & credit cost key monitorable

Management expects loan growth to gradually improve as interest rates stabilize/soften, NIM for full-year to be minimum 10 bps higher than FY23 and credit cost to stay at normalized run-rate of 45-50 bps on steady early delinquency buckets and expected NPL resolutions/recoveries. The co. is starting FY24 with stronger margin and incremental trends in yields & CoF are likely to be favourable in first half of the year.

Our FY24/25 earnings estimates witness an upgrade of 12%/4% on the back of substantial PAT beat in Q4 FY23 and raising of NIM assumption. We see avg 13% RoE delivery over next two years on a portfolio growth of 10-11% pa. While valuation is undemanding at 0.7x FY25 P/ABV, a significant re-rating would be contingent on more confidence around growth and asset quality. Retain BUY with 12m PT of Rs470.

Incremental CoF starts to moderate; increase in Stage-2 likely to reverse

LIC HF’s incremental CoF has moderated by 15-20 bps in the current quarter due to softening of bond yields. Co.’s 50% of borrowings is in the form of NCDs and it borrowed Rs296bn from the bond market during FY23 (of the total borrowings raised worth Rs684bn). The bank loans (34% of borrowings) are linked to Repo, T-Bills and 3m MCLR, which means bulk of their re-pricing in behind. The co. has taken another PLR hike of 25 bps from April 1st which should push the portfolio yield further higher.

Stage-2 loan assets increased by 37% qoq (rose from 3.9% to 5.3% of portfolio) in Q4 FY23 due to significant flows from Stage-1, mainly representing accounts where EMIs got increased after significant rate transmission (210 bps PLR hike till Jan’23). However, the management explained that these defaults were largely technical (paid old EMI) and would get corrected in Q1 FY24 itself

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