Neutral LIC Housing Finance Ltd for the Target Rs.650 by Motilal Oswal Financial Services Ltd
Margin pressure to weigh on loan growth in FY26
Sequential contraction in NIM; seasonal deterioration in asset quality
* LIC Housing Finance’s (LICHF) 1QFY26 PAT grew ~5% YoY to ~INR13.6b (in line). NII in 1QFY26 rose ~4% YoY to ~INR20.7b (in line). Fee and other income grew 170% YoY to INR1.2b.
* Opex grew ~12% YoY to INR2.9b (~17% lower than est.) and the costincome ratio rose ~50bp YoY to ~13.4% (PY: ~12.9% and PQ: ~19.4%). PPoP grew ~7% YoY to ~INR18.9b (in line).
* Reported yields declined ~20bp QoQ to 9.6%, while CoB declined ~25bp QoQ to ~7.5%. This resulted in spreads improving ~5bp QoQ to ~2.1%. NIM contracted ~20bp QoQ to ~2.68%.
* Management highlighted the intense competition from banks, particularly in the super prime segment, and acknowledged the need to carefully navigate the trade-off between loan growth and margins. However, the company reiterated its intent to prioritize NIM over aggressive loan growth. Management continued to guide for NIM of ~2.6-2.8% in FY26. We estimate NIM of 2.6%/2.7% in FY26/FY27 (vs. ~2.8% in FY25).
* LICHF shared that majority of slippages during the quarter emerged from the retail and individual home loan segments, driven by some pressure on collections. However, the company has strengthened its collection efforts and witnessed a slight improvement in Jul’25. It continued to guide for credit costs of ~9-15bp, with expectations of asset quality improvement in the subsequent quarters of this fiscal year.
* We estimate a CAGR of ~8%/3% in advances/PAT over FY25-27 and RoA/RoE of 1.6%/13% by FY27. LICHF is also making efforts to diversify into the affordable housing segment and focus on the non-housing segment to drive incremental growth and support margins, but we believe this strategic shift will be challenging and slow, given the company’s limited track record and operational capability in these segments. For LICHF, FY26 will primarily revolve around balancing the trade-offs between loan growth and NIM. With no near-term catalyst, we reiterate our NEUTRAL rating on the stock with a TP of INR650 (based on 0.8x Mar’27E P/BV).
Weak disbursements lead to loan growth of ~7% YoY
* Loan disbursements in individual home loans (IHL) grew ~3% YoY, while non-housing individual/commercial disbursements rose 17% YoY. Builder/project loan disbursements declined ~70% YoY.
* Total disbursements rose ~2% YoY to ~INR131b. Overall loan book grew ~7% YoY and ~0.6% QoQ to INR3.1t. Home loans grew ~7% YoY, while the developer loan book grew ~14% YoY. We estimate disbursements growth of ~8% YoY and total loan growth of ~7.5% YoY in FY26.
Seasonal deterioration in asset quality; PCR declines across all buckets
* GS3/NS3 rose ~15bp/10bp QoQ to ~2.61%/1.3%. Stage 3 PCR declined ~40pp QoQ to ~50.8% (PQ: ~51.2%). Stage 1 PCR declined to ~18bp (PQ: ~20bp), and Stage 2 PCR declined 25bp QoQ to 3.75% (PQ: 4%).
* Stage 2 + 3 assets (30+ dpd) rose ~30bp QoQ to 6.2% (vs. ~5.9% in Mar’25). ECL/EAD rose ~4bp QoQ to ~1.63% (vs. 1.59% in 4QFY25).
* Seasonal slippages in asset quality resulted in credit costs of ~INR1.9b (~42% higher than MOFSLe) and translated into annualized credit costs of 25bp (PY: ~14bp and PQ: 20bp). We model credit costs of ~17bp/25bp in FY26/FY27. (FY25: 10bp)
Highlights from the management commentary
* LICHF acknowledged that some weakness in disbursements and loan growth was partly due to a delay in reducing its lending rates. The company had anticipated a strong pickup in demand following the repo rate cuts; however, the demand momentum is yet to materialize.
* Management indicated that going forward, the decline in the cost of borrowings will help offset the contraction in yields on advances. LICHF is experiencing a greater benefit from the reduction in its borrowing costs than the impact of pressure on yields.
* LICHF is making slow and steady progress in the affordable housing segment. Disbursements in this segment stood at INR4.58b in FY26, and the company targets disbursements of ~INR10b in FY27.
Valuation and view
* LICHF delivered an operationally soft quarter, with subdued loan growth and disbursements. Asset quality weakened, mainly due to seasonal factors and some slippages in collections, as seen in the sequential rise in its 30+ dpd loans. Margins also came under pressure, primarily from lower yields after the recent repo rate reductions.
* We believe that the declining interest rate environment, coupled with an intensifying aggression from banks (particularly in the super prime segment), will weigh on LICHF’s loan growth and the consequent trade-off with margins.
* LICHF’s valuation of ~0.7x FY27E P/BV reflects the inability of the franchise to deliver stronger loan growth. We estimate a CAGR of just ~8%/3% in advances/PAT over FY25-27 and RoA/RoE of 1.6%/13% by FY27. Reiterate our Neutral rating on the stock with a TP of INR650 (based on 0.8x Mar’27E BV).
* Key risks: a) an elongated period of weak loan growth due to high competitive intensity and b) volatility in the NIM profile and ECL provisioning.
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