NBFC Q2 Preview: Loan growth a bright spot, margins may bother

Results on October 12: Wipro, HCL Technologies to be in focus ahead of quarterly earnings. Wipro, HCL Technologies, Sterling and Wilson Renewable Energy, 7NR Retail, Artson Engineering, Mangalam Industrial Finance, Mega Nirman and Industries, National Standard (India), Nxtdigital, Sanathnagar Enterprises, Standard Capital Markets, and Yash Chemex will be in focus ahead of quarterly earnings on October 12.

India’s non-banking finance companies (NBFC) could report a strong operating performance for the July-September quarter on the back of the recent surge in credit demand, especially from the retail segment.

A spot of bother would be the rising cost of funds and the pressure on margins for most NBFCs. Analysts expect housing finance companies to tide over this better than others while microfinance lenders may wrestle with lingering asset quality issues. Vehicle financiers are expected to show a jump in disbursals led by the recent revival in commercial vehicle space.
Net profit growth may show deceleration owing to a high base for most NBFCs.

Analysts at Kotak Institutional Equities expect NBFCs across cohorts to report double-digit loan growth with housing finance companies and consumer finance firms such as Bajaj Finance showing more than 20 percent growth.

“Loan growth in 2QFY23E qoq will likely be similar to 1QFY23 levels. Loan growth on a yoy basis will likely accelerate by 50-300 bps over 2Q levels to 10-35%,” they said in their preview note. A further improvement in asset quality and a reduction in credit costs could boost profitability among most lenders. “We expect credit cost to be lower QoQ for most NBFCs, but opex will rise with high attrition and tech-spends,” said analysts at Edelweiss Securities Ltd.

Housing boom intact

Helped by a recovery in home sales, low cost of funds and a relatively safe asset class, housing finance companies could see Q2FY23 stacking up to the first quarter exuberance. Analysts at Emkay Global Financial Services peg the disbursement growth of most HFCs above 14 percent. “We expect loan growth to be strong across our covered NBFCs/HFCs. Housing demand has held up well despite rising interest rates; activity in affordable housing has been strong. We expect HFC loans (ex LICHF) to grow at 22% YoY in 2QFY23 led by strong growth at affordable HFCs like Aavas and Aptus,” analysts at Jefferies India Pvt Ltd wrote in their preview note.

Affordable housing has been a key driver of growth for most HFCs and those focused on this segment could continue to show strong performance. Further, margins are likely to show an uptick, unlike other asset classes. Affordable housing finance lenders have been able to get bank funding easily and even at lower rates.

Vehicles speed up

NBFCs giving vehicle loans such as Shriram Transport Finance Corporation Ltd, Mahindra & Mahindra Financial Services Ltd, and Cholamandalam Investment and Finance Company Ltd could see a sequential jump in disbursals. The demand for passenger vehicles has only increased, reflected in the long wait period for their purchases. That along with recovery in other commercial vehicles, including used ones, augur well for loan growth. That said, analysts expect more pressure on margins for vehicle financiers than other NBFCs. “We expect margins at auto financiers to fall 7-15 bps QoQ across our covered vehicle financiers due to rising funding costs. Trends could diverge on a YoY basis. We forecast higher NIM compression at Chola (-15 bps QoQ) due to higher floating rate liabilities (50%+),” analysts at Jefferies India Pvt Ltd wrote in a note.

Analysts at Kotak expect asset quality to show a divergent trend among vehicle financiers. Lenders having a larger rural exposure may face elevated slippages, the brokerage pointed out. Credit costs and bad loans for most other NBFCs may show a decline, thereby boosting profitability, analysts said.

Consumption brightens

With the ongoing festival season, consumption-driven borrowings are expected to show a healthy pick-up. Ergo, lenders such as Bajaj Finance Ltd and gold loan lenders such as Muthoot Finance may show a jump in their assets under management. Analysts at Motilal Oswal Financial Services expect Bajaj Finance to report 28 percent year-on-year growth in AUM. Gold loan lenders may see improvement in margins as they focus on high-yielding and lower-ticket gold loan disbursements.