Moneycontrol Bureau
Morgan Stanley has downgraded LIC Housing Finance to equal-weight from overweight, citing weak and uncertain revenue outlook driven by unexpected lending rate cuts by banks. It expects near-term pressure on the stock, but on a one-year view, it does not expect downside, as the stock trades at 1.9x FY18 book value.
The brokerage house also slashed target price to Rs 560 (from Rs 700 earlier) after it cut FY17/18/19 EPS estimates by 1 / 16.5 / 22 percent on lower net interest margin (NIM) and loan growth.
It cut average NIM estimate for FY18-19 by 35 basis points, and FY16-19 loan CAGR to 12 percent from 16 percent due to both balance transfers and demonetisation.
Marginal cost of funds based lending rate (MCLR) cuts announced by SBI and other PSU banks on January 1 were much greater than expected, the brokerage house says.
Following SBI's 90bp cut in the MCLR, the cumulative cut since April 2016 is 120bp against a 60bp cut in retail term deposit rates. SBI has cut home loan rates by 50bp. The mortgage spread over MCLR is now 65bp but could be at risk if competition intensifies, according to the research firm.
It feels this one-time meaningful cut has raised risk of higher prepayments/repricing pressures for housing finance companies and will weigh on NIM & lower spreads.
According to Morgan Stanley, banks are likely to be aggressive in pursuing loan takeovers, given weak system loan growth. Housing finance companies will likely be forced to either reprice old loans lower or risk higher prepayments from balance transfers. Hence, the new business growth for the company is likely to be weak.
The research firm expects pressure in the next few quarters from old loan repricing even as fixed-rate liabilities take time to reprice.
The brokerage house may consider overweight rating in future if wholesale funding costs drop further and MCLR resets higher quickly & loan growth is faster than expected.Posted by Sunil Shankar Matkar
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