IGI Logo

Asset quality improves but loan growth still muted

Earnings in line even as NIM moderates QoQ

* LICHF reported a 2QFY24 PAT of ~INR11.9b (in line), which grew 290% YoY, driven by healthy NII growth (even as 2QFY23 had the lagged impact of transmission of interest rates) and in-line credit costs.

* NII at ~INR21.1b (in line) rose ~81% YoY in 2QFY24, while PPOP at INR19b (5% beat) grew 100% YoY (but declined 5% QoQ). Cost-to-income ratio stood at ~12% (PY: ~22% and PQ: ~11%).

* NIM (reported), at ~3%, contracted ~15bp QoQ in 2QFY24. As of 1HFY24, reported yields and CoF stood at 10% and 7.7%, respectively, leading to spreads of 2.4% (v/s 1QFY24 spreads of 2.5%). We do not believe that NIMs can be sustained at current levels and model a NIM compression (from current levels) for the rest of the fiscal year.

* We model NIM of 2.9%/2.7%/2.6% for FY24/FY25/FY26. To factor in the higher NIM (v/s earlier expectations) and lower credit costs, we increase our FY24E EPS by ~5%. We model an advances/PAT CAGR of 9%/21% over FY23-26E for an RoA/RoE of 1.5%/14% in FY26E.

* Moderation in yields driven by re-pricing for customer retention and muted loan growth was a dampener despite the asset quality improvement (aided by technical write-offs). While we hope for the volatility in NIM and ECL provisioning to subside, we still see a favorable risk-reward at 0.7x Sep’25 P/BV. We reiterate our BUY rating with an unchanged TP of INR550 (premised on 0.8x Sep’25E P/BV).

Highlights from the management commentary

* LICHF maintained its loan growth guidance of 12%-15% in FY24. Management believes that the growth requirement in 2HFY24 will be higher to achieve this guidance but is reasonably confident of achieving the same.

* Management guided for NIM in the range of 2.6-2.8% in FY24. Assuming the status quo in policy repo rates, it should be able to maintain the NIM in FY25 as well.

* LICHF guided for credit costs of ~50-55bp in FY24 and the costs should decline further by 10-15bp in FY25/FY26E.

Valuation and View

* LICHF has strong moats in retail mortgages and on the liability side and it has demonstrated its ability to transmit higher borrowing costs to its customers. We model credit costs of ~55bp (vs. guidance of 50-55bp).

* LICHF’s valuation of 0.7x Sep’25E P/BV reflects the volatility in LICHF’s NIM trajectory, asset quality, write-offs and ECL provisioning. We estimate an RoA/RoE of 1.5%/14% in FY26 and reiterate our BUY rating on the stock with a unchanged TP of INR550 (based on 0.8x Sep’25E BVPS).

* Key downside risks: a) Slippages from the restructured pool, leading to higher credit costs, and b) volatility in NIM profile and ECL provisioning.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412