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Weak operating performance; NIM contracts ~40bp QoQ

Credit costs benign at ~20bp, aided by provision releases

* LICHF's 1QFY25 PAT declined ~2% YoY to ~INR13b (in line). NII declined ~10% YoY to ~INR19.9b (8% miss). NII included NPA recoveries of INR900m (vs. INR2.3b in 4QFY24).

* Opex grew ~8% YoY to INR2.6b, and the cost-to-income ratio rose ~2pp YoY to ~13% (vs. ~11% in 1QFY24). PPoP at ~INR17.7b (8% miss) declined ~12% YoY.

* Reported yields and CoF stood at 9.8% and ~7.8%, respectively, leading to spreads of 2.1% (vs. 2.15% in 4QFY24). NIM dipped ~40bp QoQ to ~2.75%, partly due to lower NPA recoveries vs. 4QFY24. However, the management expects NIM to recover in the coming quarters and to be around 2.7%-2.9% in FY25. We estimate NIM of 2.9%/2.7% in FY25/FY26.

* We keep our FY25E/FY26E estimates largely unchanged. We estimate a CAGR of 9%/4% in advances/PAT over FY24-26 and RoA/RoE of 1.6%/14% in FY26.

* The company is looking to diversify its product mix by increasing the proportion of non-housing loans and the self-employed customer mix. Riskreward is favorable at 1.0x FY26 P/BV. Reiterate BUY with a TP of INR860 (premised on 1.2x FY26E P/BV).

Disbursements muted; loan growth weak

* For LICHF, the base quarter, 1QFY24, was severely affected by technology changes. Loan disbursements rose ~16% YoY in individual home loans and 23% YoY in non-housing individual/commercial loans. Project loan disbursements grew ~108% YoY. Total disbursements increased by ~19% YoY to ~INR129b (muted vs. expectations).

* Overall loan book grew ~4% YoY and ~1% QoQ. Home loans grew ~7% YoY, while developer loan book declined ~51% YoY.

* The management shared that it continues to see downward pressure on the repricing of loans at lower interest rates to retain customers. The company also aims to increase its other loans (NHI, NHC and Project Loans) to ~20% of disbursements by FY25 (vs. ~13% in FY24). We model a CAGR of ~9% in advances over FY24-FY26E.

Highlights from the management commentary

* 1QFY25 credit costs stood at ~19bp and the company guided for FY25 credit costs of ~25-30bp.

* The management expects Stage 1 PCR to remain around 18-20bp; Stage 2 PCR in the range of 4%-5%, Stage 3 PCR at ~50% and ECL/EAD to remain around ~2%

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 higher credit costs of ~40bp for FY25 (vs. guidance of ~25-30bp).

* LICHF’s valuation of ~1.0x FY26E P/BV reflects volatility in its provision cover and NIM profile, along with muted execution on loan growth. We estimate RoA/RoE of 1.6%/14% in FY26 and reiterate our BUY rating with a TP of INR860 (based on 1.2x 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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