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MOSL: LIC HOUSING FINANCE (Buy)-Asset quality pressures in wholesale book-cut estimates by 4-5%

LIC Housing Finance: Asset quality pressures in wholesale book; cut estimates by 4-5%

(LICHF IN, Mkt Cap USD3.5b, CMP INR496, TP INR580, 17% Upside, Buy)

 

• LICHF reported 1QFY20 PAT of INR6.1b, 8% below our estimate, driven by higher-than-expected credit costs.
• Asset quality deteriorated meaningfully in the quarter - the gross stage 3 ratio increased 40bp QoQ/80bp YoY to 2.0%, driven by ~INR7b slippages in corporate loans from three large accounts. PCR declined 500bp QoQ to 45%. Note that stage 2 assets were also up 30bp QoQ/90bp YoY to 4.7%.
• Disbursements were up 7% YoY to INR103b, driven by an 8% YoY increase in individual loan (incl. LAP) disbursements to INR94b. Overall loan book growth was healthy at 16% YoY. After several quarters of a decline, the share of home loans was stable sequentially at 76%. The share of LAP and builder loans was also largely stable.
• While yields were sequentially stable, cost of funds (calc.) jumped 20bp QoQ to 8.4%, leading to 1.3% spreads in the quarter. Borrowing mix was largely stable. Opex was up 26% YoY to INR1.1b.
• Valuation and view: While the company's operating performance has been steady, the continued increase in the GNPL ratio is concerning. Individual GNPL ratio has increased from 40bp to 125bp over the past two years. Corporate GNPL ratio, too, has been elevated at 10%+. Hence, we cut our FY20/21 EPS estimates by 4-5% to account for elevated credit costs. Buy with a target price of INR580 (1.4x FY21E BVPS).