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Buy LIC Housing Finance - Still a preferred play in mortgages - IIFL
Posted On : 2012-09-17 21:45:10( TIMEZONE : IST )
LIC Housing Finance (LICHF) remains a key player in mortgage lending. We expect expanding distribution to sustain loan growth ahead of peers. LICHF has several levers to improve its NIM and profitability. However, increase in competitive intensity is likely to limit the upside from such levers. Nevertheless, robust loan growth and benign asset quality would drive earnings Cagr of 26% during FY12-15ii. Robust earnings growth, high RoE and inexpensive valuations underpin our positive view on the stock.
Robust loan growth likely over the medium term: Retail mortgage would remain the key driver of overall loan growth. Focus on non-metro cities, expanding distribution and competitive lending rates would drive loan growth through FY15ii. We believe increase in competitive intensity is unlikely to be a threat, since LICHF's strong brand identity, large network, and well established processes would enable it to defend its market position. Non-retail lending growth, though likely to show significant acceleration, would remain a small portion of total loans.
Competition likely to keep lending spreads at FY12 level: Banks are likely to turn more aggressive with mortgage loan pricing due to sluggish loan growth prospects in other segments and risk aversion to lending to the industrial and infrastructure sectors. Lending spreads compressed for LICHF in FY12 and we expect them to stay at these levels in FY13ii too. However, an upward revision in lending rates to the teaser loan portfolio is likely to provide a reprieve to NIMs.
RoA increase likely beyond FY13ii: Given higher competitive intensity, we temper our expectations for spread accretion, leading to an 8.9% and 7.5% cut in earnings estimates in FY13ii and FY14ii respectively. However, an overall improvement of 23bps in spread and higher operating leverage will help improve RoA to 1.6% and RoE to 18-20% by FY14ii. Valuation at 1.9X FY13ii P/B is attractive, given 26% earnings CAGR and benign asset quality.
