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‘Credit cost likely to remain elevated’

* LIC Housing Finance Limited (LICHF) is one of the largest housing finance companies in India with loan book size of Rs2.3 lakh crore. Providing home credit over the last 30 years, LICHF has one of India’s most extensive marketing network with ~300 marketing officers & ~13,500 intermediaries across the country. As of FY21, loan book composition includes, retail home loans at 78%, non-core loans at 15% and developer loans at 7%. During FY19-FY21, loan book grew by a CAGR of 8.3% and net profit by a CAGR of 6%. RoE/RoA stood at 14.1%/1.2% in FY21.

* Operating performance remained strong in Q4FY21 as NII grew by 36% YoY. NIM improved by 30 bps QoQ to 2.7% on the back of sharp decline in the cost of borrowings (CoB). PPOP rose by 55.6% YoY which the company utilize for increasing the provisioning because despite having a large stress pool, credit cost was only 16bps in 9MFY21. While in Q4, LICHF increased credit cost to 43 bps and for FY21 to 60 bps. Stage 3 coverage ratio stood at 40% while coverage on stage 1&2 at 7 bps remained poor compared to 143 bps for HDFC.

* GNPA rose to 4.0% in Q4FY21 from 2.86% in Q4FY20, while stage 2 assets remained elevated at 6.2% (4.6% in Q4FY20) adding concern on assets quality front. Developers NPA stood at elevated level at 18% (16% in Q3FY21); further delay in recoveries of big developers a/c also worrisome the situation. Restructuring book stood at 2.5% of loans forming part of stage 1 assets. Meanwhile, GNPA at 1.9% for individual home loan book largely remained contained due to higher base at 87% of salaried professional. Collection efficiency for regular a/c was also improved to 98% in May’21.

* Disbursements remained strong at Rs22,362 cr (97.5% YoY/32.7% QoQ) with over 30% QoQ growth in individual loans however developer loans disbursement remained muted in line with strategy. Mgmt expects double digit growth in advances book in FY22 with strong off-take in H2FY22.

* Incremental cost of borrowing reduced due to high sourcing from the banks which carry high surplus liquidity. Bank’s term loan is available ~1.5-2% cheaper than NCD for LICHF. Reduced CoB is providing a strong flip to NIM. Given the low provisioning compared to stress assets, it requires close watch to what extent the benefit of expanded margin to offset by required provisioning. Meanwhile, ROE is expected to remain at satisfactory level at ~15% over the next two fiscals. At the CMP of Rs468, LICHF’s stock is trading at trailing P/ABV of 1.6x. We assign ‘Hold’ rating to stock with target price of Rs515 valuing at 1.3xFY23E.

Operating performance remains strong in Q4YF21; provisioning weigh on profitability

NII grew by 36% YoY and 20.1% QoQ on the back of decline in COB which reduced by 120 bps YoY to 6.9% in Q4FY21. The company is utilizing the opportunity of surplus liquidity with banks which proving cheaper loans compared to NCD. OPEX de-grew by -9.9% YoY thereby C/I ratio declined to 15.4% in Q4FY21 (23.9% in Q4FY20). LICHF rose provisioning in Q4 at Rs977 cr which weighed on profitability. The company reported PAT at Rs399 cr in Q4 (- 5.3% YoY/-45.1% QoQ).

Advances grew by 10% YoY; strong pick up in disbursements

LICHF witnessed robust pick up in credit growth. Loans grew by 5.4% QoQ while disbursements rose by 33% sequentially. Credit growth led by individual home loans while the company continued to de-focus on developer loans segment. Loan mix as of FY21 include individual (retail) home loans at 78%, retail nonhome loans at 15% and developer loans at 7%. As per the mgmt, credit growth to remain strong in H2FY21

Key Q4FY21 Con-call Highlights:

* As per the mgmt, majority of restructured a/c are performing and are in stage 1.

* Collection efficiency improved to 98% in May. Mgmt has revalued the underlying stress for Covid impact and prudentially provided for it.

* GNPA for developers loans rose to 18% in Q4 from 16% in Q3.

* Break-up of GNPA includes:

* Retail home loans: 1.89%

* Retail non- core loans: 5.82%

* Developers loans: 18%

* Almost Rs14bn assets (5 big accounts) falling under Swami Fund seeking resolution. Swami Fund only a last mile funding option and doesn’t guarantee upgrades.

* Stage 2 assets for retail loans stood at 4.9% as of Q4.

* During Q4, 34% of individual home loan disbursement were towards affordable housing segment.

* The company has repriced a large proportion of advances

* Mgmt expects double digit credit growth in FY22

* The company stated that the probability of further interest rate decline is less.

* Rs250-280 bn of NCD will mature in FY22

* The company raised Rs8 bn Tier 2 capital in Q4

* The company’s board has approved fresh issue of 45.4mn equity shares to LIC (promoter) through preferential allotment. Post this, LIC’s stake shall increase to 45% from 40%.

Valuation and View

NIM improved by 30 bps QoQ to 2.7% on the back of sharp decline in the cost of borrowings. PPOP rose by 55.6% YoY which the company utilize for increasing the provisioning because despite having a large stress pool, credit cost was only 16bps in 9MFY21. While in Q4, LICHF increased credit cost to 43 bps and for FY21 to 60 bps. Stage 3 coverage ratio stood at 40% while coverage on stage 1&2 at 7 bps remained poor compared to 143 bps for HDFC. Mgmt expects double digit growth in advances book in FY22 with strong off-take in H2FY22.

Incremental cost of borrowing reduced due to high sourcing from the banks which carry high surplus liquidity. Bank’s term loan is available ~1.5-2% cheaper than NCD for LICHF. Reduction in CoF is providing a strong flip to NIM. Given the low provisioning compared to stress assets, it requires close watch to what extent the benefit of expanded margin to offset by required provisioning.

Meanwhile, ROE is expected to remain at satisfactory level at ~15% over the next two fiscals. At the CMP of Rs468, LICHF’s stock is trading at trailing P/ABV of 1.6x. We assign ‘Hold’ rating to stock with target price of Rs515 valuing at 1.3xFY23E

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