LIC Housing Finance's Q3FY18 results (Neutral) - Margins and developer NPLs disappoint again
- LICHF’s PAT of Rs4.9bn declined 2% yoy and remained flat qoq. PAT was below our estimate of Rs5.3bn due to lower than expected NIMs. Over the last few quarters, LICHF has disappointed on NIMs and developer NPLs and the same trend continued in 3Q18.
- NIM declined by 5bps qoq to 2.33% against our expectation of an improvement. We had expected NIMs to improve by 7-10bps because in 2Q NIMs were supressed by a one-off rise in developer NPLs. However NIMs declined due to pressure on yield on individual loans which declined from 9.7% to 9.55%. Also, it is discomforting that over the last few quarters the company has started using short term CPs (which are borrowed and repaid within the quarter) to keep borrowing costs low.
- After many quarters, disbursals in core retail loans grew strongly at 32% qoq and 9% yoy while growth in LAP disbursals slowed to 34% yoy and 11% qoq. LAP AUMs grew 46% yoy while pure retail loans grew at a slower 11% yoy. While LAP continues to grow faster than core retail, the growth in LAP AUMs has slowed from 57% yoy in 2Q to 46% in 3Q.
- Developer NPLs rose 15% sequentially in 3Q. In all developer NPLs have risen sharply in 9MFY18 by 88% and now account for 10.96% of loans. While developers NPLs are rising, the company continues to pursue strong growth in this segment. Developer loans grew 38% yoy and 4% qoq against growth of 15%yoy and 3% qoq in the individual book.
- Loan repayments / prepayments touched the highest ever level of 19.9% versus 18.0% qoq. Individual repayments rose from 17.9% to 18.8% while developer repayments rose from 21% to 49% qoq. In the individual segment, LAP repayments rose substantially to 30% from 19% qoq while core retail repayments fell marginally from 18% to 17%. Credit cost fell sequentially from 15bps of end loans to 12 bps
Valuation and view: A rapid rise in developer NPLs, pressure on NIMs that could worsen in FY19, and higher repayments remain our key concerns. Given that valuations are at a steep discount to other NBFCs we maintain Neutral. Management believes margins have peaked. Management also indicated that there could be write backs from developer NPLs. Of the total developer NPLs of Rs6.5bn, Rs4.5bn is from 5 accounts. Recovery in the largest one can happen any time now. We believe margins could see more pressure with a slowdown in LAP and intense competition in core retail. We cut earnings. We cut TP to Rs585.
LIC Housing Finance provides loans for purchase, construction, repairs and renovation of houses and flats to individuals, corporate bodies, builders and co-operative housing societies. Co.'s subsidiary is engaged in the business of setting up, running and maintaining assisted living community centre and care homes for senior citizens.
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