EUR 4.56 For Business Accounts Only

JKSB Full Year Highlights_LB Finance PLC (LFIN)_FY17

LFIN reported full year earnings of Rs. 3.9bn for FY17, +5% YoY, in-line with our projection of Rs. 4.0bn. Bottom line growth for the year was supported by three strong quarters over 1QFY17-3QFY17, which offset an expected weak 4Q in which NPAT dropped 15% YoY. Full year net interest income rose 13% YoY for FY17, on the back of robust loan book growth (+25% YoY) amid an anticipated contraction in NIM of ~100bps YoY arising from higher funding costs. An increased cost to income ratio (+3ppt YoY to 39%) for the year mainly reflects higher personnel expenses, stemming partly from branch expansion (due to the full impact of eight new branches opened in 4QFY16 as well as incremental contribution from eight new branches added during FY17). Impairment reversals for both 4QFY17 and full year FY17 were supported by an improved NPL ratio (due to better debt recovery) and a lower-than-expected LGD (Loss Given Default) ratio (given a sharp increase in second hand vehicle prices). As expected, LFIN saw a slowdown in leasing disbursements in 4QFY17 on the back of a reduction in the LTV ratio on three wheelers from 70% to 25% in 4QFY17, resulting in a halving of monthly three wheeler disbursement volumes during the quarter (vs. monthly disbursements over 9MFY17). While this has been partially offset by strong disbursements in the two wheeler segment, this segment has a lower ticket size vs. three wheelers. On the funding side, roughly two thirds of deposit growth for the year came in 4QFY17 from the retail segment.

We project full year earnings of Rs. 4.2bn for FY18E, +7% YoY. While we project 15%-17% loan book growth for the year, we expect NIMs to see a further contraction during the year coupled with a higher cost to income ratio. We expect LFIN to see a pick-up in leasing disbursements in the commercial vehicle category (tippers etc) in FY18 - due to strong demand from subcontractors in the construction segment - as well as continued healthy demand in the two wheeler segment. At its current price of Rs. 124.90, LFIN trades at a FY18E P/E of 4.1x, in-line with its peer average, and at a P/BV of 1.4x (based on March 2017 NAVPS) which represents a slight premium to its peer average.