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JKSB Quarterly Highlights_LB Finance PLC (LFIN)_1QFY18

LFIN reported a modest 3% YoY increase in earnings for 1QFY18, with growth in net interest income (+10% YoY) being partially offset by an increased cost to income ratio (+1.8ppt YoY to 39.5%) and sharply higher impairment provisioning (+206% YoY). Roughly one third of the impairment provisioning is, however, attributable to additional provisioning in preparation for adoption of SLFRS 9. Net loan book growth (+3.7% YoY) for the quarter was driven by 1) micro leasing (motor bikes and three wheelers) disbursements; and 2) strong growth in gold loans and small ticket property/mortgage loans. While new loans are being disbursed at higher rates, the contraction in LFIN’s NIM was expected given rising funding costs across the sector amid an asset liability maturity mismatch. As expected, the stringent 25% LTV cap on new three wheeler loans/leases has resulted in a shift in demand to registered vehicles (registered for more than one year), which now account for ~70% of LFIN’s leasing disbursements in this asset category.

 We maintain our full year earnings projection of Rs. 4.2bn for FY18E, +7% YoY, on the back of an expected 15%-17% loan book growth for the year driven by the micro leasing segment, property/mortgage loans and gold loans. We expect the more stringent LTV ratio caps - and higher vehicle prices - to translate to improved asset quality across the NBFI sector, due to higher switching costs for existing vehicle owners. While we note that the increased contribution from the higher risk registered three wheeler segment could negatively impact NPLs for LFIN, this should be offset by the significant yield differential vs. unregistered vehicles. At its current price of Rs. 135.30, LFIN trades at a FY18E P/E of 4.5x, in-line with its peer average, and at a P/BV of 1.4x (based on June 2017 NAVPS) which represents a  premium to its peer average.