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Stable margins, loan growth remains moderate

Earnings beat aided by largely stable NIM and controlled opex

LICHF’s PAT jumped 142% YoY to ~INR11.6b (~6% beat) in 3QFY24 and 9MFY24 PAT surged 115% YoY to ~INR36.7b. PAT growth was driven by a largely stable NIM and controlled opex.

NII at ~INR21b (7% beat) rose ~31% YoY. PPoP at ~INR18.8b (9% beat) grew ~39% YoY but declined 1% QoQ. The cost-income ratio remained stable QoQ at ~12% (vs. ~18% in 3QFY23).

NIM contracted ~5bp QoQ to ~3% in 3QFY24. As of 9MFY24, reported yields and CoF stood at ~10% and ~7.7%, respectively, leading to spreads of ~2.3% (1HFY24: 2.4%). The management has guided for NIM of 2.8%-3% in 4QFY24, which might moderate further in FY25. We model NIM of 3.0%/2.75%/2.65% in FY24/FY25/FY26.

To factor in higher NIM (vs. earlier expectations) and lower opex, we increase our FY24/FY25 EPS estimates by ~8%/4%. We model a CAGR of 8%/21% in advances/PAT over FY23-26 and RoA/RoE of 1.6%/14% in FY26

The moderation in yields was driven by repricing for customer retention. High competitive intensity can lead to a contraction in NIM in FY25. While we hope for the volatility in ECL provisioning to subside, there are upside risks from provision reversals on stressed wholesale asset resolutions in the year ahead. Risk-reward is favorable at 0.9x FY26 P/BV. We reiterate our BUY rating with a TP of INR755 (premised on 1.1x FY26E P/BV).

Highlights from the management commentary

LICHF has finalized its ARC policies and an ARC committee has been formed in its central office. The company has also appointed a consultant who will help it evaluate ARC proposals and take it forward. On the pilot basis, LICHF will take 10 stressed accounts to ARCs in FY24. Next year, it might take an even bigger loan pool to ARCs, depending on the outcome of the pilot.

It has guided for credit costs of ~50-55bp in FY24 and lower in FY25.

Valuation and View

LICHF has strong moats in retail mortgages and on the liability side. It has demonstrated its ability to transmit higher borrowing costs to customers. We model credit costs of ~60bp for FY24 (vs. guidance of 50-55bp).

LICHF’s valuation of 0.9x FY26E P/BV reflects the volatility in LICHF’s NIM trajectory, asset quality, write-offs, and ECL provisioning. We estimate RoA/RoE of 1.6%/14.4% in FY26 and reiterate our BUY rating on the stock with a TP of INR755 (based on 1.1x FY26E BVPS).

Key downside risks: a) elongated period of weak loan growth because of muted demand or high competitive intensity; and b) volatility in NIM profile and ECL provisioning.

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