While potential slowdown in property sector due to demonetisation may affect loan growth, LIC Housing appears better positioned, given its presence in affordable housing segment. It should also gain from potential government incentives to boost the sector. Falling home loan rates should weigh on yields, but repricing of NCDs and lower funding cost should cushion NIMs. We trim our FY18e EPS by 3%. Valuations at 2.1x BV appear reasonable. Maintain Buy.
Expect steady loan growth over FY16-18e
Core home loan disbursal at LICHF slowed to 4.3% y-o-y in Q3 (Q2 12.7%) due to demonetisation. Management indicated that its new home loan products launched in January are seeing good traction, given lower interest rates. While 45% y-o-y growth in developer loan in Q3 was a concern, LICHF indicated that this reflected disbursal pertaining to past sanctions. LICHF has maintained its loan growth target of 14-15% in FY17. We believe expectation of lower property prices could weigh on core home loan growth, but potential government incentives could offer support. We forecast AUM to grow at 12.5% CAGR over FY16-18E.
Lower interest costs could cushion impact of lower home loan rates
Spread on incremental book was 2.5% higher than average spread on LICHF’s existing book (1.83%) in Q3. This should offer headroom to absorb the recent 50-55 bps cut in home loan rates. While part of the higher yielding back book could be repriced lower, this could be largely cushioned by potential 25 bps of interest cost savings due to refinancing of 13% of NCDs. We trim our NIM estimates factoring in lower spreads. We forecast NIM of 2.65% in FY17E and 2.59% in FY18E (2.52% FY16).
Asset quality and credit costs to remain stable
We believe potential asset quality risk (Q3 GNPA 0.56%) at LICHF due to demonetisation is lower vs. most housing finance peers given focus on less risky salaried customers, low ticket size and lower mix of risky non-core assets (developer, LAP) vs peers. GNPA in developer loans is high, but this represents only 3% of loan book.
LICHF is trading at 2.1x FY18e BV and 12x FY18E EPS. Our revised PT R620 based on residual income valuation implies 2.5x FY18e BV & 14x FY18e EPS. Risks: slower loan growth, lower NIMs due to competition and repricing of loans, increase in bond yields.