LIC Housing Finance's Q4FY19 results (Neutral) - Asset quality remains the key challenge

Q4FY19 result highlights

• While LICHF’s PAT beat ours and consensus estimates by a wide margin, both retail and developer asset quality disappointed.
• Retail NPLs rose sharply by 31% qoq in a quarter that is seasonally very good for retail recoveries. Developer NPLs also rose sharply by 28% qoq. Total NPLs rose 30% qoq to 1.53% from 1.26% qoq. Within retail, while LAP NPLs have remained stable at 1.4%, core retail NPLs have grown from 0.76% to 0.94% yoy. There is no segment or geographic bias in NPLs in core retail loans. In the developer segment, most of the slippage was from South based developers.
• There was a strong beat on NII driven by a huge NIM expansion of 21 bps qoq to 2.54%. NIMs expanded strongly even when there was a sharp rise in NPLs because under INDAS companies can continue to accrue income on bad loans but will also have to make high provisions too. NIMs expanded as LICHF hiked PLR by 10bps in 4Q and loan mix shifted in favour of developer loans / LAP.
• Disbursement growth picked up with total disbursals growing 7% yoy and 46% qoq. Retail disbursals grew 10% yoy and 44% qoq. Developer disbursals declined 10% yoy but grew 64% qoq.
• Loans grew 16% yoy and 6% qoq. Individual loans grew 14% yoy and 7% qoq while developer loans grew 61% yoy and 13% qoq. Within individual loans, LAP grew faster at 21% yoy and 11% qoq while core retail loans grew 12% yoy and 6% qoq. Share of core retail loans declined 113 bps qoq to 76% while share of riskier LAP loans improved 70 bps to 17.2% and share of developer loans rose 40bps to 6.7%. Core NII grew 21% yoy and 15% qoq and was significantly higher than our estimate driven by higher NIMs. PPOP grew 25% yoy and 27% qoq.
• While stage 1+ stage 2 loans have remained flat qoq and stage 3 loans (NPLs) have risen 26% qoq, it has been the reverse for ECL based provisioning. The ECL based provisioning has declined for stage 3 loans and increased for the other two stages. Mgmt. explained that they expect some of the stage 3 assets to get upgraded to stage 2 and hence the shifting of provisioning. It may be noted that in 3Q LICHF had shifted provisions from stage1+2 to stage 3 and in 4Q they seem to have done the reverse.

Valuation and view: A sharp rise in retail NPLs in a seasonally strong quarter and rising risks in the developer book will weigh on the stock’s valuation. We believe asset quality concerns will overpower the company’s AAA rating and strong liquidity profile relative to other NBFCs and its cheap valuations. Continued strong growth in the developer book even in a weak environment and excessive volatility in ECL provisions across stages and across quarters remain key concerns. Given cheap valuations we retain Neutral.. Cut TP to Rs475 from Rs490.