Within non-banks, LIC Housing Finance Ltd (LHF) has been the biggest underperformer in last six months (down 25-30% vs Sensex) on growth and margin worries.
However, LIC has navigated H1’14 well on both these counts. LIC is confident of approximately 20% growth, with stable to rising spreads and stable asset quality. LHF believes it may see approximately 8-10% y-o-y disbursement growth in 3Q and 20%+ loan growth, as competitive intensity stands reduced, with SBI’s (largest home lender) recent rate hike.
Incrementally, spreads are likely to improve, in our view, as LHF has been reducing bank borrowings (approximately 28% of funds) and replacing with bonds (at least approximately 60-80bps cost differential). Moreover, it has also raised its retail lending rates by approximately 10bps from October 13 (re-price approximately 50% of loans).
LHF’s conversion to a bank will be medium term dilutive on returns (estimated RoAs to fall to approximately 1.0% vs 1.5% estimated). However, we believe it will be able to better weather the ‘conversion’ owing to strong parentage (LIC, parent) for liability side and also diversify into higher yielding products.
LHF’s healthy capital position and strong distribution network may still lead to market share gains. Finally, asset quality comfort is high in current weak macro. We reiterate buy, with a target price of Rs 280.