We maintain a ?buy? rating on LIC Housing Finance (LICHF) and assign a target of R320 per share as strong momentum in loan growth and NIMs shored up core profitability in Q4 FY14. A sequential improvement in NIMs (on strong loan growth) led to a growth in NII, which along with provisioning write-backs buoyed PAT (up 25% y-o-y). A shift towards wholesale borrowings may drive lower funding costs and NIM improvement.
We maintain FY15 and FY16 estimates. With 19% earnings CAGR/100 bps RoE improvement over FY14-16, valuations at 1.6x FY15 B/V remain attractive. The P/B discount to HDFC shrunk from 214% in March 2014 to 173% in April 2014, but remains higher than the mean of ~100% during October 2010 to February 2013. With an improving profitability outlook, the discount to peers may narrow in our view.
LICHF?s NII growth at 15.7% y-o-y was above estimates driven by strong growth in the loan book (up 17% y-o-y) and NIM expansion. The q-o-q improvement in NIMs (up 24 bps) was driven by a 32-bps decline in funding costs. Yield on individual loans declined 6 bps q-o-q while yields on developer loans slid 37 bps q-o-q (due reversal on slippages of R370 crore in December 2013). We forecast a mere 4 bps y-o-y improvement in NIMs in FY15. A shift towards wholesale borrowings (~70% of total borrowings) may drive lower funding costs and NIM improvement, posing an upside risk to our estimates.
Religare Institutional Research
