LIC Housing Finance's Q1FY20 results (Neutral) - Sharp rise in developer and retail NPLs

Q1FY20 result highlights

• LICHF’s PAT of Rs6.1bn grew 8% yoy but was lower than our estimate of Rs6.7bn. The miss was on account of a sharp increase in credit cost.
• Total disbursals grew 7% yoy with retail growing 8% (lower than 10% in 4Q) and developer disbursals declining 7%. Within retail, both core and non-core grew at 8%. Loans grew 17% yoy with retail growing 15% and developer loans growing 62%. Core retail loans grew 13% yoy while LAP grew 24%. Affordable housing accounts for 21% of disbursals.
• NIM declined 19bps qoq to 2.35%. NII grew 13% yoy, lower than our expectation of 16% due to lower than expected NIM. Most of the incremental funding during the quarter came from public deposits and NHB refinance. Mgmt expects cost of funds to stay flat or decline in the quarters ahead. However, given weak disbursal growth, we expect LICHF to pass on the benefit of lower cost to its customers. Already the bank is offering individual loans at 8.4% as a special limited period offer against marginal cost of funds f 8.24%.
• Credit cost rose sharply by 46% yoy and 158% qoq to 0.5% from 0.2% in 4Q19. Core PBT rose 6% yoy but declined 15% qoq.
• Gross stage 3 loans rose sharply by 25% qoq and now account for 1.98% of loans versus 1.58% in 4Q. The sharp increase in NPLs was driven by developer and core retail loans. Developer NPLs rose sharply by 74% qoq to 11.6% of loans (7% in 4Q19), amongst the highest for any HFC. 3 developer accounts of Rs6.8b slipped in 1Q. Of the total developer slippage, Rs5.3bn was from projects where there was delay in payments while Rs1.5bn was from standard accounts belonging to the same developer that had to be classified as NPL based on RBI norms. The accounts that slipped were completed projects where sales were weak. The vintage of these accounts is 3 years. Management explained that the security cover on developer NPLs is 1.5x while the LTV is 50%. Core retail NPLs also rose sharply by 16% to 1.03% of loans from 0.9% qoq and 0.7% yoy. There has been a sharp increase in developer and retail NPLs over the last five quarters. Total retail NPLs have grown 2.5x while developer NPLs have grown 1.5x over 4Q18 – 1Q20. Total NPLs including developer and retail rose 31% qoq to 2%

Valuation and view

We believe asset quality concerns will overpower the company’s AAA rating and strong liquidity profile. Continued strong growth in the developer book even in a weak environment, subdued growth in the retail segment and rising NPLs remain key concerns. Given cheap valuations we retain Neutral. We are leaving our earnings and TP unchanged.