LIC Housing Finance's Q2FY19 results (Neutral) - Rising developer exposure is a risk

Q2FY19 results highlights

• LICHF’s PAT of Rs5.7bn was lower than our estimate of Rs6.3bn due to a sharp increase in ECL based provisions. PAT grew 11% yoy and 1% qoq.
• Disbursement growth shot up to 30% yoy and 49% qoq the strongest in many quarters. While individual disbursals grew 9% qoq, developer disbursals grew strongly at 384% yoy and 231% qoq. Even within individual disbursals, growth in LAP was 171% yoy while growth in core retail was subdued at 6.7% yoy.
• Loan growth was healthy at 16% yoy but LAP and developer loans grew faster than core retail loans. Core retail loans grew 9% yoy and3% qoq while LAP grew strongly at 41% yoy and 4% qoq and developer loans grew 83% yoy and 29% qoq.
• ECL provisions made through the income statement grew sharply qoq from Rs1.6bn to Rs2.2bn which we believe would be due to increase in expected credit loss on the developer portfolio. GNPAs rose 5% qoq. Increase in stage 3 loans was Rs3bn and it was from the individual portfolio not the developer portfolio. Recoveries in stage 3 were Rs2bn.
• Outstanding ECL provisions also rose sharply not only because of the increase in flow provisions but because of the surplus/floating provisions of Rs3bn under the previous accounting standard (IND GAAP)  which the company chose not to write back to shareholders’ funds. The increase in ECL provisions was on account of earlier floating provisions clubbed with ECL provisions not because of an increase in expected losses.
• NIM remained stable qoq at 2.35%. NII grew 9% yoy and 4% qoq

Valuation and view:

With loan growth driven by LAP and developer loans rather than core retail loans we view this result as weak. We view the strong growth in developer loans as a big negative as the real estate sector is currently under stress following the liquidity crunch at NBFCs and LICHF’s own asset quality historical performance of the developer book has been weaker than peers. We believe spreads will fall in 2H even with lagged asset repricing as cost of funds is likely to rise faster than yields. Also, the increase in cost of funds and decline in spreads could be sharper in 1QFY20E once the lagged repricing of loans is exhausted. We cut target multiple to 1.4x and TP to Rs490. After the steep price correction, downside is limited. As such we maintain Neutral, but we do not see any positive triggers.