After navigating several speed bumps in recent years, non-banking finance companies are back on a strong growth trajectory amid robust loan demand, peaking interest rates, and stable asset quality, analysts said.
NBFCs have withstood many setbacks, including Covid, demonetisation, and the crisis that followed the default by IL&FS Financial Services in 2018. However, the just-concluded Q4 earnings season showed that NBFCs have weathered these challenges.
“For 4QFY23, aggregate profit of our covered NBFCs/housing finance companies (HFCs)… grew 12 percent YoY (39 percent QoQ) and was 20 percent above our estimate,” global brokerage Jefferies said in a report.
Loan growth was driven by auto NBFCs and affordable housing finance companies. Growth at larger HFCs that lend to the prime housing segment moderated.
Also Read: No stress in BFSI, NBFC shares to catch up with rest of market: Mahesh Patil
Management commentary was bullish across most segments. In the rural markets, borrower cash flows and demand for vehicles have been strong.
“Loan growth at NBFC/HFCs should stay healthy at 14-15 percent in FY24 even as we expect some moderation in loan growth in mid-ticket housing segment,” it added.
Macro advantage
Credit spreads for NBFCs/HFCs, which widened due to higher risk aversion after the IL&FS crisis, have normalised.
Moreover, while rising rates have pressured net interest margins (NIMs) at NBFCs, with inflation easing and the Reserve Bank of India pausing rate hikes in April, interest rates are likely near a peak.
“We believe NIMs at NBFCs/HFCs are near a trough. As drag to NII from falling NIMs recede, profit growth should accelerate. Any rate cuts in next 12-18 months (not in our estimate) can be an additional tailwind,” analysts at Jefferies added.
Money managers said NBFC stocks are poised for a rebound.
Mahesh Patil, chief investment officer at Aditya Birla Sun Life AMC, noted that NBFCs underperformed during the interest rate hike cycle last year, but are expected to catch up this financial year. Personal lending and mortgages are picking up, indicating positive growth in those sectors, Patil added.
Also Read: RBI to strengthen NBFC regulations in 2023-24, to examine licensing requirements
What is adding to the cheer for investors is that most non-bank lenders reported lower gross non-performing assets in FY23. NBFCs have utilised most of the overlay provision created during Covid.
Analysts expect asset quality to hold up and credit costs to stay near normalised levels. However, this does not mean the horizon is completely clear.
“With 35%+ of retail borrowers (especially home loan borrowers) having seen meaningful hikes in rates, we watch for any signs of stress emerging, especially in unsecured segments,” Jefferies added.
Its top picks in the NBFC segment include Cholamandalam Investment and Finance Company, Bajaj Finance, Can Fin Homes Ltd and SBI Cards.
Pockets of opportunities
With banks getting aggressive in the retail segment, especially housing, auto and personal loans, NBFCs are eyeing less-penetrated segments including affordable housing, small business loans and used vehicles.
Analysts also highlighted a sub-segment of NBFCs – microfinance institutions (NBFC-MFIs). Assets under management (AUM) of NBFC-MFIs are set to grow 25-30 percent this financial year amid improving asset quality and continued traction in economic activity, Crisil Ratings said.
Overall, the microfinance sector’s AUMs are estimated to have crossed Rs 3.4 lakh crore as of March 2023, with NBFC-MFIs outpacing small finance banks, universal banks and other lenders. NBFC-MFIs now have the largest lending footprint in microfinance with AUM of about Rs 1.3 lakh crore.
“(NBFC-MFIs’) focus on intra-state penetration has meant the top five states now comprise over half of the industry AUM. Bihar has the largest share at 12.7 percent, followed by Tamil Nadu (11.1 percent) and Karnataka (10 percent),” said Ajit Velonie, senior director at Crisil Ratings.
Click here for list of top NBFCs in terms of net profit
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