Morgan Stanley likes NBFCs but cuts EPS forecast for sector due to NIM pressures

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26 Aug, 2025 12:21

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Morgan Stanley has published a report on the NBFC (non-banking finance companies) sector, in which it said that it likes the sector for investment at the moment.

However, the foreign brokerage cut earnings per share (EPS) forecast, accounting for transient NIM (net interest margin) pressures with valuations reflecting higher CoE.

In its report, Morgan Stanley said that both short-term and long-term market borrowing rates are up since September 2017, while State Bank of India's one-year retail term deposit rate is down 35 basis points and MCLR is up only 15 bps higher.

It expects a return to equilibrium over the next 12-18 months. But Morgan Stanley believes that the delay will test NBFCs, especially HFCs (competing with banks in all of their loan segments).

"We like M&M Financial Services, Shriram Transport Finance, Bajaj Finance and Edelweiss Financial and have overweight rating on these stocks. We like NBFCs structurally; however, we expect most to de-rate over the next year, since rising rates are negative for sentiment," it said. "Investors are likely to be cautious in the early stages of a rising rate cycle. Our preference for NBFCs over the next year will be below corporate and private retail banks."

The brokerage cut Indiabulls Housing Finance and Aditya Birla Capital to underweight mainly for lower relative upside potential. It is of the view that return on equity (ROE) will be in back in fashion as the key valuation metric over high top-line growth.

The greatest P/B–ROE disconnect is being seen at PNB Housing Finance and AB Capital. However, LIC Housing Finance is at attractive valuations for the medium term and the brokerage has an overweight stance on the stock.

But the near-term concern is volatility in interest rates. Morgan Stanley has an equal weight on Shriram City Union Finance as some clarity on capital deployment .

It is of the view that NBFCs that operate in traditional non-bank segments, which is with differentiation in product or customer segment, will be back in vogue rather than asset aggregators. With cost of equity rising, ROE should gain importance as the key valuation metric over top-line growth.

Morgan Stanley expects certain businesses like Bajaj Finance and Edelweiss Financial Services to continue to trade at premium multiples with sustained delivery and visibility of high growth and high ROE.