LIC Housing Finance (LICHF) reported in-line PAT of R382 crore (up 19% y-o-y) but NII at Rs 660 crore (up 30% y-o-y) was a big beat versus our forecast with ~15bps q-o-q spread expansion versus 7 bps expected. The wholesale funding advantage is clearly showing up now with cost of funds down 20bps vs FY15 and loan yields have remained sticky, which is LICHF’s unique advantage relative to peers. While disbursement growth is slowing due to underlying weakness in property market, NIM expansion is likely to continue to drive earnings growth.
Cost of funds dipped ~20bps vs FY15 driving the spread expansion. Bonds contributed all of the incremental borrowings and with incremental cost of funds still at 8.96% in Q1FY16 versus 9.38% avgerage, spread expansion has more legs.
With base rate reductions, system mortgage rates has come off but LICHF’s yields have remained relatively sticky as >50% of LICHF’s loan book is fixed rate. Large share of fixed rate loans and increasing share of LAP will continue to aid margins.
We raise our FY16/17f earnings each by ~4% and lift our target price by ~8% to R540, implying 2.5x FY17f book. LICHF remains our preferred play on lower wholesale funding rate; while we factor in benefit of lower wholesale rates, we do not factor in upside from higher builder book and book accretive capital issue.