We trim FY19-20e EPS by 1-2%. Spreads should improve q-o-q, but sharp increase appears unlikely. Competition may continue to weigh on AUM growth. Proj. loans have aided growth, but slippage remains high in this segment. At 1.6x FY20e BV, valuations appear reasonable. Hold.

PAT rose 18% y-o-y in Q1: PPOP rose 10.6% y-o-y as weaker NII (6.6% y-o-y) was offset by lower opex as per Ind AS. Credit costs were much higher under Ind AS, but this was offset by lower tax.

Other key impact of Ind AS transition incl. FY18 BV uplift of ~`11-12 bn (9%) mainly due to release of DTL. Mgmt expects Rs 2-2.5 bn of gains from excess ECL provision release in coming quarters.

Loan grew 14.7% y-o-y, home loan disbursal muted: Home loan grew 8.8% y-o-y, noncore loan grew 44% y-o-y (project loan 49.5%, LAP 42.5%). Disbursal grew 10% y-o-y (HL 7% y-o-y, LAP -6% y-o-y, project loan +115% y-o-y). Mix of non-core loans rose to 21% (19.2% Q4). Retail sanctions were up 13%. Competition in salaried segment may be weighing on loan growth. LICHF has opened 24 marketing offices in new locations, which should contribute to growth. We forecast 14.8% loan CAGR over FY18-20e.

NIMs fall 18bps y-o-y, but should improve modestly: Q1 NIM (Ind AS) was 2.34% (Q4 2.49% GAAP). LICHF has taken three rate hikes aggregating to 30 bps in Q1 (April, mid June) and another 20 bps hike in August. Portfolio spreads rose 9 bps q-o-q to 1.9%, reflecting part of the rate hike. Full impact of lending rate hike and re-pricing of back book should lift spreads. NCDs maturing in FY19 (13% of borrowings) would likely be refinanced at similar costs (8.5% avg coupon). Incremental spreads are higher at 2.2% (factoring rate hike) vs.back book, but incremental funding cost may rise as funding mix normalises (higher CP funding in Q1). We forecast NIMs of 2.38% in FY19e and 2.46% in FY20e.

Asset quality worsens: Q1 GNPA/ Stage 3 assets rose 43 bps q-o-q to 1.2% (Individual GNPA 0.81%, +39 bps and developer GNPA 8.8% +100 bps q-o-q). This is despite `400 mn of recovery

(`700 mn including interest) pertaining to a large account. While GNPA usually rises in Q1, the jump is higher than usual seasonality and is a concern. LICHF’s mix of project loans have been steadily rising, but its track record on underwriting project loans remains patchy. Q1 ECL provision was ~0.54% (0.49%). Credit cost under Ind AS has increased to 0.38% in Q1 (0.56% Q1 FY18 vs. 0.27% as per GAAP).