Q3 earnings preview: NBFC margins may shrink amid robust growth

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The October-December 2022 quarter is expected to show divergent trends among non-bank financial companies (NBFC), with housing and vehicle financiers reporting strong disbursement growth while gold loan lenders showing some drag in growth. Net interest margins may, however, moderate for most NBFCs and weigh on interest income, according to analysts.

Analysts at Jefferies India Pvt Ltd expect the nine NBFCs under their coverage to report a 9 percent growth in net profit at the aggregate level for the third quarter.

“Loans at our covered housing finance companies (HFCs) / affordable HFCs should grow at 13 percent year on year (YoY) led by 30 percent YoY loan growth at our covered AHFCs. At auto financiers, loan growth should accelerate due to healthy disbursements in 3QFY23,” they wrote in a note.

Those at Motilal Oswal Financial Services expect a better 13 percent growth in profits for the quarter.

Disbursals of home loans have been robust for the past quarter but select housing finance companies have also seen the momentum slowing down. Therefore, on a sequential basis, disbursements could see some moderation, according to analysts.

For auto financiers, the quarter has been marked with strong momentum in loan demand, helped partly by the continued recovery in commercial vehicle sales.

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Companies such as Cholamandalam Investment and Fin Co Ltd, Shriram Transport Finance Corporation Ltd and Mahindra & Mahindra Financial Services Ltd may report double-digit loan growth.

Jefferies expects Cholamandalam to see the strongest asset under management (AUM) expansion at 27 percent followed by Mahindra Finance at around 20 percent.

The margin shrinkage

The single metric that may set NBFCs apart would be the extent of margin compression for the quarter. The rise in interest rates following a series of policy rate hikes has increased the cost of funds of most NBFCs as banks have hiked lending rates.

Banks are the biggest source of funds for NBFCs, reflected in the sharp growth of bank credit to non-banks during October-December. Analysts expect most NBFCs to report a sharp rise in their cost of funds. Those with higher debt ratings may feel the pinch less.

The pressure on net interest margin is palpable but some lenders have been able to pass on their costs through lending rate hikes. “We expect NBFCs in our coverage universe to report a 23 bps quarter-on-quarter (QoQ) decline in NIMs on the back of the rise in the cost of funds triggered by annual MCLR resets and rising deposit rates, coupled with lag in transmission of yield hikes,” analysts at Emkay Global Financial Services wrote in their note.

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LIC Housing Finance could be an outlier and report an improvement in margins, given that the lender’s credit costs may begin to moderate now. In the July-September quarter, the lender saw lumpy delinquencies that drove up its credit costs and eroded margins somewhat.

Vehicle financiers, on the other hand, may see a larger margin compression than home loan lenders given the difference in their cost of funds. HFCs tend to get cheaper borrowings from the bond market as well as banks.

Stress to reduce

Most NBFCs may report stable asset quality or even an improvement in bad loan ratios. “Lower bounce rates, higher collections, and customer settlements would likely translate into an improvement in GS3 (gross stage three) and sequential decline in credit costs,” point out Motilal Oswal analysts.

Further, with the Reserve Bank of India’s norms on asset quality kicking in from the third quarter, a sequential improvement in bad loan metrics would be seen, according to analysts. The RBI has tightened the norms for NBFCs by bringing them on par with banks in terms of recognition of bad assets and classification of a loan as bad.

Mahindra Finance is likely to live up to its guidance of 50 basis points sequential decline in stage three assets, analysts said. Shriram Transport and Cholamandalam may also report lower delinquencies. Home loan lenders are also likely to continue to report stable asset quality for the third quarter and provisioning needs may come down, boosting profitability.