We initiate coverage of Life Insurance Housing (LICHF) with a buy rating and R698 price target. We believe NIMs at LICHF should expand as falling bond yields should reduce borrowing costs.
Loan growth should be steady as structural drivers remain in place and core home loan growth improves due to recent government measures. We expect FY16-18e earnings CAGR of 19% and RoE to exceed 20%. Our Residual Income (RI) valuation based PT of R698 implies 17% potential upside.
Steady loan growth momentum should sustain
LICHF should gain from structural growth in housing finance, pay panel boost and government thrust on housing. Its core home loan growth slowed in FY16 due to rising competition and higher prepayments, but recent measures, including (i) launch of a pure floating product, (ii) reduction of fixed to floating reset and (iii) option to reset floating rates lower, could mitigate these issues. We believe core loan growth should improve steadily, which along with growth in loan against property (LAP) should drive 16% loan CAGR over FY16-18e.
NIMs to expand due to falling bond yields
LICHF is well positioned to benefit from falling bond yields (80% of borrowings), as potential refinancing of 28% of its NCDs post maturity over FY16-18e could lead to around 30-34bps of interest cost savings (assuming current bond yields). While part of the higher yielding back book could be repriced lower, this could be offset by lower interest costs. At current interest rates, blended spreads on new loans are around 2% (home loans 1.68%) vs 1.64% in Q1 (home loans 1.3%). Higher spreads on new assets should lead to steady 14bps NIM expansion over FY16-18e.
Asset quality and credit costs to remain stable
GNPA (0.6%) is low compared to housing finance peers given focus on less risky salaried customers, low ticket size and lower mix of risky non-core assets vs peers. Its LAP loans are much more conservative vs usual LAP. GNPA in developer loans is high, but it represents only 3% of its loan book.
LICHF is trading at 2.4x FY18E BV (2.6x ABV) at a 23% discount to the average of HFC peers. HDFC’s implied mortgage business is trading at 4.1x (implied mortgage RoE of 24-26%).Valuations at 12x FY18e appear attractive given 19% EPS growth outlook. Our PT of R698 based on Residual Income valuation implies 2.8x BV and 3x ABV. We believe a strong 19% EPS growth and RoE outlook could lead to potential re-rating. Risks: slower loan growth, lower NIMs due to competition and repricing of loans, and increase in bond yields.