With LICHF's GNPA's rising 80 bps to 1.98% over last year in Q1FY10 led by a sharp increase in developer GNPA, a key concern is around potential further rise in developer GNPA given broader stress in the real estate sector.
Concern around possible rise in asset quality stress has weighed on stock price, but this appears already priced in. LICHF is trading at 1.3-1.4x FY20 stressed BV near FY13 trough valuation (avg 1.7x). Developer mix at 7% is below most peers. With strong parentage, AAA rating, access to low-cost funding, it is better positioned among most peers. Potential fall in bond yields could lift incremental spreads, a key margin and valuation driver. We reiterate ‘buy’.
With LICHF’s GNPA’s rising 80 bps to 1.98% over last year in Q1FY10 led by a sharp increase in developer GNPA, a key concern is around potential further rise in developer GNPA given broader stress in the real estate sector. LICHF’s developer GNPA is 11.8% ~29% of developer portfolio on a two-year lag basis. Assuming a stressed scenario, wherein 30% of current developer portfolio slips and assuming a 50-75% haircut, we estimate potential hit to BV could be 5-8% and stressed BV/share could be Rs 347-333. Even on these estimates, LICHF is trading at 1.3-1.4x FY20 BV at a discount to historic avg valuation of 1.7x and near FY13 trough. Rising retail GNPA (+80 bps over last two years) in FY19 has been a concern too, but there are signs of stabilisation. An 11 bps q-o-q increase in June quarter was broadly in line with historic seasonal trends, which provides some comfort.
While funding environment is tight and risk aversion towards NBFC/HFC is elevated, LIC Housing appears better positioned amongst most peers given its strong parentage and AAA rating. Notably, amidst elevated risk aversion, funding has been polarised towards select AAA NBFCs/ HFCs, with liquid debt securities.
We believe LICHF could benefit from potential fall in bond yields as a) NCDs account for ~73% of its borrowings; b) spreads on new loans should expand as HL rate cuts should lag fall in marginal funding costs given relatively lower competition. Incremental spreads (~1.74%) was below book spreads (1.99%) in Q1. We believe NIMs should stabilise and could potentially edge up. We forecast NIMs of 2.39-2.38% for FY20 /21 (2.36% FY19). Notably, LICHF P/B valuation has also been strongly correlated to incremental spreads.