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JKSB Quarterly Highlights : LB Finance PLC (LFIN) : 2QFY17

Note Summary:

LFIN reported a 20% YoY increase in earnings for 2QFY17, driven mainly by 1) a 17% increase in net interest income on the back of moderate loan book growth (+10.5% in 1HFY17); and 2) a reversal of impairment provisions on its leasing portfolio, supported by a further improvement in NPLs and a sharp increase in second hand vehicle prices (which resulted in a lower-than-expected LGD ratio). While LFIN has seen a near 60% decline in leasing volumes of unregistered three wheelers (vs. FY16 levels), this has been partially offset by increased disbursements in the higher margin second-hand three wheeler segment. Given that NPLs in the registered three wheeler segment are typically higher than unregistered vehicles, LFIN could see a slight deterioration in asset quality of its leasing portfolio going forward. However, this should be offset by the higher yield on registered vehicles (lending rate is 7%-8% higher), while the imposition of a more stringent 70% LTV ratio amid rising second hand vehicle prices should further mitigate the risk of defaults.

While 1HFY17 earnings are up 19% YoY, we have revised our full year PAT projection for FY17 down to Rs. 4.0bn (+8% YoY) on concerns of rising funding costs in 2HFY17, as a lack of liquidity in the system, following a 1.5% increase in the Statutory Reserve Ratio, has resulted in a sharp increase in deposit rates in recent months. With large LCBs such as HNB now offering rates of >12% (AER) on 6 month FDs, LFIN and other finance companies are offering the ceiling deposit rate of 12.5% on one year FDs. Consequently, the CBSL is expected to raise the cap on deposit interest rates offered by finance companies which would result in a further increase in funding costs across the sector. At its current price of Rs. 128.30, LFIN trades at a FY17E P/E of 4.4x, at the lower end of its historical trading range of 5x-6x, and at an unwarranted discount to its peer average FY17E P/E multiple of 5.3x. The stock currently trades at a P/BV of 1.6x (based on September 2016 NAVPS) and offers a generous 6% dividend yield.