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Traction in home loans positively surprised; denoted mkt. share gains

LIC HF delivered significant growth acceleration in Individual Home Loans segment (78% of loan assets) in Q4 FY21, with the portfolio growing at an annualized rate of 25% (yoy growth jumped to 12% from 6% in Q3 FY21) driven by substantial disbursements (Rs190bn) that were higher 31% qoq and 114% yoy. This relatively stronger growth traction denotes material market share gains for the co. during H2 FY21. Management alluded to having experienced robust growth in Maharashtra (14% of FY21 disbursements) and Karnataka where the Stamp Duty was reduced.

Home Loans disbursement ATS in FY21 was ~5% higher than FY20. Portfolio run‐off rate was higher than pre‐Covid experience, with lumpsum pre‐payments (BT Out) rate having increased marginally in FY21. Sequential growth in Retail LAP & Other Loans and Project Loans was modest despite significant disbursements. LIC HF expects growth to bounce back in rest of the year, particularly in Tier 1‐3 locations and in affordable housing segment. Management hopes to clock double‐digit growth in FY22. 

Sharp expansion in NIM/Spread aided by lower incremental CoF

Aided by an extremely favourable liquidity/interest rate scenario and sustained shift in funding mix away from NCDs (towards Banks and Deposits), the computed cost of funds (CoF) declined sharply in Q4 FY21. Cost of incremental funds was 5.2‐5.3% during H2 FY21, and thus notwithstanding substantial disbursements at competitive rates the quarterly NIM/Spread expanded by 40‐50 bps in Q4 FY21. The aforesaid shift in funding mix which increases re‐pricing frequency is complimented by steady rise in share of floating rate loans. LIC HF does not expect much reduction in portfolio yield henceforth. NIM and Spread would receive support from continued benign funding scenario and redemption of NCDs worth Rs250‐280bn in FY22.

Deterioration in asset quality and improved coverage drive higher credit cost

There was a mild increase in LIC HF’s PAR 30 portfolio (Stage 2 & 3) on sequential basis. While Stage‐2 assets % proved to be sticky, there was a material rise in Stage‐3 assets (from 2.7% to 4.1%). GNPL/Stage‐3 assets in home loans, retail LAP & other loans and project loans were at 1.9%, 5.8% and 18% respectively. Sequentially there was an increase of Rs36.5bn in Stage‐3 assets  ‐ Rs3bn in project loans and the balance in individual loans portfolio. Collection efficiency for March was at 98%, similar to December 2020. The portfolio restructured was at 1.5% of loan assets.

Credit cost was substantially higher in Q4 FY21 at Rs9.8bn due to a) ~Rs3bn impairment reserve created on restructured pool, b) significant flow to Stage‐3 assets and c) prudential increase in ECL coverage across buckets post an extensive collateral revaluation exercise to factor Covid impact (ECL/EAD rose from 1.3% to 1.7%). LIC HF has been able to collect 90%+ from regular customers in May and expects incremental restructuring of 1%.  It is more confident about FY22 credit cost outcome after having raised ECL coverage. Co. also carries an impairment reserve on the balance sheet which is an additional buffer.

Preferential issue to LIC will support growth; assume coverage with ADD rating

LIC HF will be issuing 45.4mn shares to its parent LIC at a price determined by SEBI regulations. The capital raise would improve Tier‐1 ratio by 140‐150 bps, and along with substantial headroom to raise Tier‐2 capital will support healthy growth. Factoring 10% loan CAGR, steady NIM and some moderation in credit cost, we estimate a stable RoA/RoE delivery of 1.3%/13‐14% over FY21‐24. While valuation is undemanding at 1.1x FY23 P/ABV, the volatility in performance has been more than palatable in the past. Cognizant of improving sector prospects, we rate the stock as ADD. In our view, investment risk‐reward for many of its peers is superior

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