LIC Housing Finance Shares Drop On Morgan Stanley, Credit Suisse Review
Lending rate cut by banks weigh in on LIC Housing Finance Ltd.
Shares of LIC Housing Finance Ltd. extended their fall for the second-straight day after two brokerage houses, Morgan Stanley and Credit Suisse cut their price targets, on the back of a slew of steep lending rate cuts announced by some other lenders.
Morgan Stanley has downgraded their rating on the largest government-owned housing finance company, by one notch from Overweight to Equal-weight, and cut the target price by 20 percent, bringing it down from Rs 700 to Rs 560 per share. The brokerage says that a sharp cut in the marginal cost of lending announced by banks like State Bank of India Ltd., clouds the revenue outlook for all housing finance companies, including LIC Housing Finance.
“ The one-time meaningful cut has raised risk of higher prepayments/repricing pressures for HFCs and will weigh on NIM (net interest margin)”, analysts Subramanian Iyer and Sumeet Kariwala, at Morgan Stanley wrote in their note to clients. The steep cut in lending rates by some of the biggest banks in the country, has surprised them negatively, they added.
Sharp Reduction In FY19 Earnings Estimate
Morgan Stanley expects banks to be aggressive going forward, in pursuing loan takeovers, given their weak loan book growth. This could force housing finance companies (HFCs) to either reprice old loans lower or risk higher prepayments from balance transfers.
New business growth is likely to be weak, and we expect pressure in the next few quarters from old loan repricing even as fixed-rate liabilities take time to reprice. We assume half of the home loan book will reprice by ~75 bps in the near term, given the size of lending rate cuts. While we need to watch if this risk materialises, this concern is likely to keep the stock under pressure.Morgan Stanley’s Note To Clients
The brokerage house has cut LIC Housing Finance’s earnings per share estimates by 1 percent for the current financial year, and by 16.5 and 22 percent for the next two financial years. The net interest margin estimates have also been cut by ~35 basis points over the next three financial years. The compounded annual loan growth estimate has also been cut by 400 basis points to 12 percent for FY16-19E.
Valuation Cushion
Morgan Stanley’s analysts do derive some comfort from LIC Housing Finance’s valuation which is currently trading in line with past historical averages, their note said. Based on Morgan Stanley’s estimates, LIC Housing Finance currently trades at 1.9xF18E BV (book value) compared to its average one-year forward P/B ratio of 2.0.
Credit Suisse has also lowered their price target on LIC Housing Finance from Rs 670 to Rs 620 while retaining their Outperform rating.
Shares of LIC Housing Finance were trading 1.3 percent at Rs 523.3 at 09.52 am on Tuesday, after closing with 5.6 percent lower on the first trading day of 2017. Larger peer, HDFC Ltd., also continued to correct for the second day, trading 1 percent lower at Rs 1,210.
Meanwhile shares of other mortgage lenders like Indiabulls Housing Finance Ltd., Repco Home Ltd. and Gruh Finance Ltd. were down between 1-2 percent, after rallying 1-4 percent on Monday. Can Fin Homes Ltd. was the only stock in the housing finance space which continued to gain for the third-straight day now, on a three-day winning streak, gaining another 1.5 percent on Tuesday.