Nomura cautious on NBFCs amid regulatory action, shares 'reduce' call on SBI Cards, M&M Financial

On a year-to-date (YTD) basis, shares of Bajaj Finance, M&M Financial, and Five Star Business Finance have declined up to 15 percent

Japanese brokerage Nomura has reiterated its cautious stance on non-bank financial companies (NBFCs), some of which recently faced RBI action, flagging a slowdown in unsecured loans, increased competition from banks, rising cost of funds and high valuations.

Shares of major NBFCs Bajaj Finance, M&M Financial, and Five Star Business Finance have declined up to 15 percent this year, while Shriram Finance and LIC Housing Finance have gained up to 14 percent.

Though valuations have come down in the past month, several NBFC stocks trade at 5-44 percent premium compared to their historical price-to-book (P/B) averages.

"We prefer Shriram Finance as it is a play on used-vehicles segment and Five-Star due to its play on secured micro-MSMEs," analysts at Namura said in a note on March 13.

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SBI Card, M&M Financial to be worst hit

The analysts said they remain negative on SBI Card due to its 100 percent unsecured book and M&M Financial Services due to its subdued return on equity (RoE) profile of 9-10 percent over the past 10 years. They have a "reduce" call on both stocks.

The overall growth of NBFCs is likely to moderate on account of multiple headwinds. On top is the regulatory action taken by the Reserve Bank of India (RBI) on unsecured loans by increasing risk-weight on them, which would eventually slow down their loan growth in the medium term.

In other unsecured loans, consumer durable or credit cards, NBFCs are losing market share to banks due to elevated competitive intensity, Nomura said.

"Even in secured segments like auto or home, NBFCs are losing market share to banks due to elevated competitive intensity," the note said.

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Cost of funds to remain elevated in FY25

Analysts expect cost of funds to remain elevated for most part of FY25 due to potential increase in rates at which banks lend to NBFCs due to increased risk weight. Potential rise in corporate/NBFCs yields, lower probability of a repo rate cut in H1FY25F, lower growth in unsecured loans and elevated competition in secured segments would add to the probelm.

"Assuming a rate cut will take place by the end of FY25, SBI Cards would be the one with the maximum positive impact, and LIC Housing Finance the lowest in FY26F. Within other NBFCs, Bajaj Finance and Cholamandalam Finance would be the least positively impacted due to rate cuts," the brokerage firm highlighted.

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