LIC Housing Finance's Q3FY19 results (Neutral) - Strong but not sustainable

Q3FY19 results highlights

• LIC Housing reported strong earnings in a weak environment. PAT of Rs5.96bn was higher than our estimate of Rs5.5bn driven by stable margins and strong AUM growth. PAT grew 26% yoy and 4% qoq. NIM remained flat qoq and yoy which is a good achievement given the liquidity crunch for  NBFCs. We believe this was because of lending rate hikes which offset  higher cost of funds and increase in the proportion of higher yielding developer loans
• Disbursement growth remained weak declining 4% yoy but grew 10% qoq.  While individual disbursals remained weak growing 2% yoy, developer disbursals were strong at 27%.  Within retail, ocre retail was flat yoy while LAP grew 10% yoy. AUMs grew 16% yoy and 3% qoq led by a growth of 84% yoy/5% qoq in developer AUMs and 46% yoy in LAP. Core retail AUMs grew 14% yoy and 3% qoq
• NIMs remained stable yoy and qoq at 2.33% which is a good achievement given the liquidity crunch for NBFCs. We believe this was because of lending rate hikes which offset higher cost of funds and increase in the proportion of higher yielding developer loans. NII grew 18% yoy and 6% qoq.
• Asset quality remained stable with gross stage 3 loans declining 2% qoq to 1.25% versus 1.27% qoq. Developer NPLs declined 8% qoq but quality of individual loans deteriorated with individual NPLs rising 19% qoq. Over March – December individual NPLs have risen sharply by 138% from 0.78% to 1.26%. Mgmt explained that there is no concentration of individual NPLs in any geography or segment (LAP/ core retail). Developer NPLs declined due to recovery of Rs600M which mgmt. explained was spread over 5-6 developer accounts. Credit cost declined sharply even after adjusting for write backs.
• There has been a regrouping of ECL provisions. Stage 1&2 provisioning reduced significantly from Rs3.9bn to Rs66m while stage 3 provisions rose sharply from Rs11bn to Rs16bn qoq. There was a shift of provisions from stage1+2 to stage 3. We believe the current provisioning cover of just Rs66M looks low compared to other HFCs/NBFCs.

Valuation and view

While earnings growth was strong we view the strong growth in developer loans as a big negative we also believe that NIMs could decline in the quarters ahead as cost of funds catch up. The company raised NCD of Rs200bn at 8.9%against the weighted average incremental lending rate of 9.2% indicating likely decline in spread going ahead. We do not find the strong performance in 3Q sustainable. Given cheap valuations we retain Neutral.