EUR 6.84 For Business Accounts Only

JKSB Corporate Update_LB Finance PLC (LFIN)_August 2016

We rate LB Finance PLC (LFIN) a BUY at current valuations, based on: 1) a higher-than-industry Net Interest Margin (12.2% in FY16 vs. a NBFI sector NIM of 8.6%); 2) a lower-than-industry Non Performing Loan ratio (3.3% NPL ratio as at Mar 2016 vs. a NBFI sector NPL ratio of 5.1%); and 3) an attractive FY16 dividend yield of ~6%. LFIN currently trades at a FY17E P/E of 4.1x and a FY17E P/BV of 1.3x - below its historical P/E trading range of 5x-6x and its historical PBV trading range of 1.5x-2x - and at an unjustified discount to its peer average FY17E P/E multiple of 5.3x.

Higher-than-peer NIMs amid improving NPLs

LFIN continues to maintain an above-peer NIM, stemming from its strong exposure to the high yield gold loan and three wheeler segments, while steadily improving its NPL ratio (-1.9ppt YoY to 3.3% in FY16) through better debt recovery/collections and a focus on better asset quality. While we expect a sector wide contraction in NIMs and a slowdown in leasing disbursements in FY17, LFIN should continue to maintain higher-than-peer NIMs and low double digit loan book growth during the year, with continued strong demand for its gold, mortgage, and working capital loan products offsetting a likely slowdown in leasing portfolio growth (while LFIN is seeing increased demand in the registered vehicle segment, we have projected a 7% YoY increase in LFIN’s leasing portfolio for FY17 vs. a 34% YoY increase in FY16, to account for the lower ticket size on second hand vehicles). While the 70% LTV ratio cap should bring about a sector wide improvement in asset quality (given a required 30% upfront commitment from customers), we have projected a broadly flat NPL ratio for LFIN over our forecast period.

Investor concerns over gold loan exposure are overplayed

While gold tends to be perceived as a riskier asset for NBFI companies since the 2013 gold price decline, we do not view LFIN’s gold loan exposure (18% of total lending portfolio as at Mar 2016) as a significant threat to near term asset quality. LFIN’s short tenor (1 month) gold loan facility - which accounted for ~75% of its total gold backed lending portfolio as at Mar 2016- has a healthy 29% safety margin (71% LTV ratio), while the overall LTV ratio on its gold portfolio is <70%. This is, in our view, a sufficient safety margin: gold prices would need to drop by 29% in a month for LFIN to see a decline in collateral value on 75% of its gold portfolio. To put this in perspective, the gold price decline during the last crash in 2013 was ~28% for the entire year.

Attractive valuations suggest >20% upside to current price; generous dividend yield of 6%

At its current price of Rs. 124.70, LFIN trades at a FY17E P/E of 4.1x and a FY17E P/BV of 1.3x, below its historical P/E trading range of 5x-6x and its historical PBV trading range of 2x. The stock also trades at an unwarranted discount to its NBFI peer average FY17E P/E of 5.3x, which could partially be due to investor concerns over the company’s exposure to gold backed lending, which are, in our view, overplayed (as detailed above). We believe LFIN deserves to trade at a FY17E P/E of 5x, in-line with its peer average and at the lower end of its historical trading range. This, coupled with a projected 6.8% dividend yield for FY17, suggests >20% shareholder return. Our current earnings projections do not factor in potential upside to loan book growth in the event proposed restrictions on bank vehicle leasing are enacted. BUY.