LIC Housing Finance (LICHF) is one of the largest housing finance companies in India with an extensive distribution network.
Special rates to capture demand: LICHF has extended its lowest mortgage rate of 6.66% for the holiday season to borrowers with a CIBIL score of 700 and above, for loans up to Rs 20 million (the previous limit was Rs 5 million). By segmenting borrowers based on their CIBIL score, regardless of job category, LICHF aims to cater to a broader borrower base.
This move is in line with the demand for larger and more affordable spaces, and good traction for loans amounting to Rs 5-20 million.
Accelerated growth in disbursements: The demand for home loans to individuals was affected by blockages located at 1TFY22. Nonetheless, individual mortgage loan disbursements have far exceeded annual levels. We expect pent-up demand to be pronounced in the remaining nine months of the current fiscal year, resulting in healthy growth in FY22 disbursements.
We anticipate a loan portfolio CAGR of 11% in fiscal years 21-24E. Since June 21, there has been an improvement in economic activity, and collection efficiency has also improved to 98%, which is encouraging. The sharp rise in Stage 3 loans is worrying. The same was exacerbated due to the impact of the second wave of Covid-19. We now estimate a cost of credit of ~ 85bp / 60bp in FY22E / FY23E.
Lower cost of funds helps spreads: After the liquidity crisis of September 2018, parentage and credit rating were of paramount importance for NBFCs / HFCs. LICHF is well placed on this front. Its incremental CoF was ~ 5% in 1QFY22. With a drop in CoF, it should be able to maintain stable spreads in the wake of pressure on prices from banks. We expect this lower CoF advantage to continue, especially in the context of a higher cost of NTMs of $ 250 billion to $ 280 billion which is priced down in FY 22 and an injection of equity capital from LIC.
A good partnership for LICHF: India Post Payments Bank (IPPB) and LICHF recently announced a strategic partnership to provide mortgage products to more than 45 million IPPB customers. Through its strong and extensive network of 650 branches and over 136,000 banking access points, IPPB will make LICHF’s mortgage products accessible to all of its clients in India. The alliance will also give LICHF access to the IPPB field workforce, made up of nearly 200,000 postal employees equipped with micro cash dispensers and biometric devices through its innovative service. home banking. This will play an important role in providing LICHF home loans.
Assessment and view: With the completion of the preferential equity allocation to its promoter LIC, the capitalization / leverage issues for LICHF have now been ironed out. Given its parentage, it has been able to raise debt capital at low rates, which should maintain a healthy margin in a highly competitive environment. Although the deterioration in asset quality has been pronounced so far, we are reassured by LICHF’s ability to find low cost liabilities, a favorable housing finance cycle and a RoE of 11-12%. While we expect the FY22E to be impacted, we estimate the RoA / RoE on the FY23E to be around 1.1% / 12%, after registering the preferential grant of new shares to the promoter. We maintain our buy rating with a TP of Rs 525 / share (1.1x FY23E BVPS).