Informist, Monday, Jul 17, 2023
By Subhana Shaikh
MUMBAI - A robust loan growth and stable asset quality are likely to help India's non-banking financial companies report healthy earnings for the quarter ended June. However, a rise in the cost of funds may weigh on the net interest margin of some companies in the pack.
"NBFCs should report healthy profit growth because of robust loan growth and broadly stable asset quality trends despite usual seasonality." Brokerage Jefferies Group said in a pre-earnings note.
"Loan growth should be strong for Cholamandalam Investment and Finance Co, Mahindra and Mahindra Financial Services, SBI Cards and Payment Services and affordable housing finance companies," the note said. "NIMs at Cholamandalam Investment, Can Fin Homes and affordable housing finance should be stable; Mahindra and Mahindra Financial Services, SBI Cards could see lower NIM QoQ."
During Apr-Jun, companies in the affordable housing finance space and the diversified non-bank lenders are seen faring better than the rest.
Analysts believe that the robust sequential growth in disbursement--led by an uptick in vehicle and home financing--is set to improve the assets under management of these non-banking financial companies. The focus on recovery during the quarter with no expectations of a moratorium amid sound economic activity is also seen as a positive.
Diversified financiers are likely to post a strong growth in lending, even as the increasing cost of funds likely weighed on their net interest margins, brokerage PhilipCapital India said.
"NBFCs shall look stronger even with a decline in NIM as their AUM growth has been strong in Q1 and seasonality in NPLs (non-performing loans) has reduced. In addition, a pause in policy rates is benefitting them," Nuvama Institutional Equities said.
Most brokerages believe that a rise in borrowing cost will put pressure on non-banking financier's margins, but Jefferies said it may vary across companies, reflecting the divergence in their cost of funds.
ICICI Securities said that the net interest margins of vehicle financiers will continue to report compression because of liability re-pricing and increasing cost of funds, but those of diversified lenders will have only minor to no impact.
While these lenders' margins will be compressed because of a rise in borrowing cost, it will also lead to lower growth in their net interest income, said Kotak Institutional Equities.
Higher borrowing cost will compress these lenders' margins and will also lead to lower growth in their net interest income, said Kotak Institutional Equities. "NII growth will likely be weaker at 11-29%, as compared to 10-37% loan growth across NBFCs. With increase in cost of funds up 50-130 bps over the last four quarters, NIM pressure is visible," it said.
Analysts seem confident that non-banking financial companies will report a stable asset quality for Apr-Jun, with stage-3 assets--which have been overdue for more than 90 days--seen range bound on a sequential basis.
"On asset quality front, we expect incremental credit cost to remain lower than FY23 level (of 1-2%) and headline asset quality metrics to continue to trend downwards," ICICI Securities said.
Further, better collection efficiency and recovery in restructured assets is seen supporting their asset quality, IDBI Capital Research said.
Brokerages believe that better collections will may also reduce credit cost, which will lift profits of non-bank lenders in Apr-Jun.
"Cash flows (both urban and rural) have held up well and contributed relatively better collection efficiencies and should lead to benign credit costs across most of the NBFCs in 1QFY24," Motilal Oswal Securities said in a pre-earnings note.
Moreover, these lenders' expense ratios, on a high base, will likely see an improvement, supporting their core earnings. Expense ratios had inched up over the past few quarters reflecting high cost pressures and investments in growth. From a high base, most companies have guided for improvement in expense ratios in 2023-24, analysts said.
With a stellar performance in the quarter ended March and business updates on Apr-Jun that have been stronger than those of banks, investor sentiment towards most non-bank lenders has turned positive.
This positive sentiment is likely to continue even if valuations look pricey for some. So far in 2023, shares of Cholamandalam Investment and Finance Co surged 64%, the highest among non-bank lenders covered by Kotak Institutional Equities. Shares of L&T Finance Holdings jumped 51%, followed by Mahindra & Mahindra Financial Services, up 46%.
Shares of Shriram Finance (at around 1,770 rupees) and LIC Housing Finance (at around 390 rupees) look attractive at their current levels, Kotak Institutional Equities said. End
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