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LIC Housing Finance Review

September 15, 2010

Mortgage affordability in India has improved in the past three years – while income levels have gone up, home prices and mortgage penetration levels have been broadly stable through this period. As a result, we expect continued strength in mortgage loan growth.

With a market share of about 8% (in outstanding loans), LICHF has made significant strides in both growth and profitability since it was re-organized by management in F2007. Improving asset quality and operating costs have lifted ROA from 1.3% in F2005 to an estimated 1.9% in F2011.

SBI and other SOE banks have been aggressive in the mortgage space in the past year, and ICICI Bank is likely to return. This should put pressure on lending yields just as LICHF’s cost of funds increases amid rising short rates. We look for its margins to
compress from 3% in QE Jun-10 to 2.6% by QE Mar-11.

Morgan is bullish on LIC Housing Finance and said Despite LICHF’s strong run year to date, we still find the stock attractive at 14x our F2011e earnings and 11x F2012e, as we expect 22% average EPS growth, 26% core pre-provision growth and 23% ROE in F2011-12.

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