Non-bank finance companies will likely report a strong operating performance in the final quarter of FY22, but signs of weaknesses in some segments will be visible.
For investors, it is critical to follow the management commentary that accompanies the earnings as the market turns challenging for lenders. Early numbers released by select non-bank lenders confirm the strong trend in growth and profitability.
“The two-year eclipse of Covid is finally behind, allowing NBFCs leverage on increasing economic activity. YoY (year-on-year) loan growth and subsequently NII (net interest income) are catching up fast, yet below pre-Covid levels due to a lead-lag effect,” analysts at Kotak Institutional Equities wrote in a note. “The impact of high fuel prices and bond yields have not affected the business of 4Q; management commentary and guidance for FY2023E in this backdrop assume importance.”
Analysts at Jefferies India said the outlook from management on risk appetite in FY23 would also be key.
Consumer lender Bajaj Finance remains the top pick for most analysts, although valuations seem to instil some caution. Bajaj Finance said its net loans rose 15 percent for the March quarter, indicating that balance sheet growth remains on track. That said, some analysts believe valuations are uncomfortable, given that customer acquisition hasn’t improved much.
Home sweet home
Housing finance companies would be the strongest corner of the NBFC population, with sharp balance sheet growth. The performance of asset financiers may be mixed, while gold loan lenders may consolidate after several quarters of robust growth, according to analysts.
“Large HFCs, namely LICHF (LIC Housing Finance), are likely to sustain low-mid-teen growth. We expect affordable housing (low-ticket) disbursements to continue with strong momentum even in Q4FY22,” analysts at ICICI Securities wrote in a note.
Real estate sops from select state governments ended in the March quarter. Maharashtra had reduced the stamp duty on home sales, which led to a surge in house purchases.
ICICI Securities expects companies under their coverage to report 11 percent year-on-year growth in assets under management and 18 percent growth in net profit. Provisions may fall 50 percent, it said.
HDFC, the largest non-bank home loan lender, is expected to report another robust quarter, with double-digit loan growth and pristine asset quality.
Moreover, the riskier developer financing portfolio showed some improvement in the December quarter, which is expected to continue in the March quarter.
Low speed for asset financiers
For asset financiers, the performance may be mixed. Here, AUM growth may not be as robust as that of other NBFCs, analysts said, because some effect of the Omicron variant of Covid-19 may be felt.
Vehicle financiers may post improvement but loan growth would still be in single digits, according to Kotak.
“Commercial vehicular financing recovery is two quarters away, microfinance 3-4 quarters away and gold financing should witness faster revival on the asset quality front,” analysts at Elara Securities wrote in a note.
There may be a sizeable improvement in Mahindra & Mahindra Financial Services’ asset quality, given robust collection efficiencies.
Among asset financiers, analysts expect Cholamandalam Investment and Finance Company to report better operating metrics than most others. The lender said its disbursements grew 58 percent in Q4FY22.
In the gold loan category, both Muthoot Finance and Mannapuram Finance may show improvement on the asset quality front. The December quarter was marred by large auctions by gold loan lenders after borrowers were unable to pay, leading to sales of the underlying gold.
Analysts expect this trend to turn for the better, helping in both balance sheet growth and asset quality for the lenders. Even so, balance sheet growth is unlikely to show a sharp improvement.
Elara analysts said Muthoot Finance’s gross bad loan pile may decline by 1.3 percent sequentially and credit costs to decline by 34 basis points. One basis point is one-hundredth of a percentage point.
The fourth quarter will show that large non-bank lenders had the wherewithal to withstand the impact of the pandemic as well as the balance sheet heft to command a competitive cost of borrowing. That said, it remains to be seen whether they can get back to their pre-pandemic trajectory and sustain it.
