LIC Housing Finance Research Report By Prabhudas Lilladher

LICHF net earnings of Rs4.99bn were in‐line with our estimates with strong NII growth of 22.6% YoY at Rs9.15bn (PLe: Rs8.82bn) but was offset by lower fee income (down 45% QoQ). Overall loan book grew at 15.3% YoY, but growth was mainly led by strong growth in developer book (45% YoY) and LAP book (87% YoY). Core retail book growth continue to be slow at 9.4% YoY. Competitive landscape continues to be tough with all asset financiers getting into faster interest rate cuts, while cost repricing has been gradual which will keep spreads steady. We retain ‘Accumulate’ with revised PT of Rs645 (from Rs630), based on 2.3x as we rollover to Sep‐18E ABV.

– In line performance on core operations: NII growth was better than expectation at Rs9.15bn up ~22.6% YoY on back of improved margins by 7bps QoQ to 2.75% as LICHF got good benefit from lowering cost of funds (14bps down QoQ) and yields were supported from strong growth in developer & LAP book. Fee income disappointed down 45% QoQ mainly on processing fees waiver in Q3FY17. LICHF expects margins have some more room for improvement as incremental cost of borrowing has been much lower in Q3FY17 which is not reflected fully reflected in borrowing costs, but we believe that the incremental benefit on cost will be offset by reduction in interest rates.

– Core mortgage portfolio growth remains a worry: Core retail loan growth remained slower at ~9.4% YoY with disbursements de‐growing 7.2% YoY which is also partly due to demonetisation. Overall loan book growth has been led by non‐core portfolio with developer loan disbursement increasing 2x QoQ. Noncore book has now reached 13.7% of loan book, with management mentioning that they would like to maintain the book at current levels as outstanding sanctions are comparatively lower and remain cautious on growing the LAP portfolio.

– Asset quality remains stable; valuations remain reasonable: Asset quality remained stable with both GNPAs & NNPAs down 1bps QoQ at 0.56% & 0.27% respectively. Valuations of 2.1x FY18E & 1.7x FY19E remains at reasonable level, but core retail book continues to struggle with risk of repricing at lower levels on competitive intensity offsetting lowering borrowing cost. Maintain Accumulate.