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Operationally healthy quarter despite one-offs

NIM rose ~15bp QoQ; sharp improvement in asset quality

* LICHF’s 4QFY24 PAT declined ~8% YoY to ~INR10.9b (8% miss) due to oneoffs in opex and tax. FY24 PAT grew ~65% YoY to INR47.6b. 4QFY24 NII at ~INR22.4b (9% beat) grew ~12% YoY. PPoP grew ~9% YoY to ~INR19b.

* Opex grew ~39% YoY to INR3.8b (32% above MOFSLe) and the cost-income ratio rose ~3pp YoY to ~17% (~14% in 4QFY23). Employee expenses rose ~INR600m QoQ, which included one-off items related to gratuity (INR220m) and arrears on wage revisions (~INR320m).

* 4QFY24 NIM expanded ~15bp QoQ to ~3.15%. As of Mar’24, reported yields and CoF stood at 9.9% and ~7.8%, respectively, leading to spreads of 2.15% (Dec’23: 2.3%). Management guided for NIM of 2.7-2.9% in FY25 and sounded confident of sustaining it at the upper end of the guidance. We model NIM of 2.9%/2.7% in FY25/FY26.

* Effective tax rate in 4Q rose to ~26% (vs. ~19.7% for the last three quarters). The 4Q tax rate included a one-off tax adjustment for DTL of prior years (~INR1.3b). Tax rate is expected to revert to ~19-20% in FY25.

* We increase our FY25E EPS by ~4% to factor in higher NIM (vs. earlier expectations). We model a CAGR of 10%/4% in advances/PAT over FY24-26 and RoA/RoE of 1.6%/14% in FY26.

* Interest income write-backs resulting from the recovery and resolution of NPA accounts have contributed significantly to achieving historically high levels of NIM in FY24. High competitive intensity and lower support from recoveries in the interest income can lead to a contraction in NIM in FY25. We see far better earnings predictability in LICHF as the asset quality continues to improve through resolutions of stressed exposures. Risk-reward is favorable at 0.9x FY26 P/BV. We reiterate our BUY rating with a TP of INR790 (premised on 1.1x FY26E P/BV).

Highlights from the management commentary

* Management guided for double-digit loan growth. It also guided for credit costs of ~40bp, and cost-income ratio of 13-14% in FY25. ? PCR on Stage 3 (S3) is one of the best among peers and it will maintain S3 PCR at its current levels of ~50%. LICHF has technical written-off pool of ~INR40b and management overlay of ~INR17-18b (over and above ECL)

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 ~45bp for FY25 (vs. guidance of 40bp).

* LICHF’s valuation of ~0.9x FY26E P/BV reflects the frequent one-offs in expenses and NIM volatility. We estimate RoA/RoE of 1.6%/14% in FY26 and reiterate our BUY rating with a TP of INR790 (based on 1.1x FY26E BV).

* 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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