NBFCs’ moment in the sun, but clouds gathering
Non-banking financial companies (NBFCs) are having their moment in the sun, poaching business from mainstream banks and making the most of an economy on the recovery path.
NBFCs have had a stellar fiscal year unlike their banking counterparts that saw a further rise in toxic loans and slowing loan growth. The Reserve Bank of India’s financial stability report shows that NBFCs saw 15.6% growth in their balance sheets as of September 2017, while their banking counterparts saw a growth of just 6.2%.
The December quarter has been another strong one for most major NBFCs. Consumer financier Bajaj Finance Ltd saw its loans grow 33%, mortgage lender HDFC Ltd saw a 19% growth while rural player Mahindra Finance Ltd grew its disbursals at a comfortable 17%. In contrast, public sector banks saw their incremental loan offtake grow by 6% while their private counterparts showed a far healthier 24% growth. Of course, a large part of this jump in loan growth has been due to the base effect for both banks and finance companies, as the quarter ended December 2016 saw demonetisation cripple disbursals.
Banks preoccupied with cleaning up their balance sheets have been losing out to NBFCs in incremental loan disbursals. Having a widely diversified loan book has helped many NBFCs tide over the distress in corporate lending as they took refuge in the fast-growing retail loan book. Of course, some like SREI Infrastructure were hit badly owing to large exposure to stressed borrowers.
Housing finance companies saw effects of Real Estate Regulation and Development Act (RERA) fade and loan growth pick up smartly. Consumer lenders continued to ride on the consumption engine driving the economic growth. Robust capital markets supported those who lend towards such assets.
Compared with their banking peers, NBFCs have shined in growth metrics in the past two years as the accompanying chart shows. Consequently, credit costs have receded and core earnings have surged.
Given that most headwinds are now behind, will this robust growth sustain?
Analysts and investors certainly seem to think so. “The impact of demonetization, initial glitches due to transition to GST and transition to 90-days past due NPL norms- all three headwinds are broadly behind the sector leading to a more positive near-term view on the business. Impetus on government spending in infra and rural sectors provide a boost,” wrote analysts at Kotak Securities in a report.
The fact that NBFC stocks trade at rich multiples show that the balance sheet growth story is well-reflected.
So, what can threaten this perfect recipe for future performance? Interest rates are on the rise and bond yields have already surged 100 basis points in the last six months. State Bank of India has raised its lending rates by 20 basis points. Bond yields and loan rates are on the climb and this will begin to hit cost of borrowings for NBFCs. Considering they are heavy borrowers in both markets, margins will be under threat.
Fiscal 2017-18 is perhaps the final year where NBFCs will see favourable cost of borrowings. From 2018-19 onwards, the pressure on margins will be palpable and most NBFCs have already guided for margin compression ahead. Looking by the gains most NBFC stocks have made since January, valuations don’t seem to adequately reflect the concerns over margin compression.
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