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Gold prices are shining: Why rising bullion is positive for gold loans?

Brokerage added that they did not come across any significant changes in gold loan rates and schemes between the last quarter and now.Premium
Brokerage added that they did not come across any significant changes in gold loan rates and schemes between the last quarter and now.

  • Motilal highlighted that from its channel checks in Southern India for gold loan NBFCs in general and Muthoot Finance in particular are -- higher gold prices have led to better gold loan demand and are also contributing to a significant decline in gold auctions

Gold prices rallied on Wednesday with the bullion at MCX closing near its day's high. Silver as well picked up momentum. At the global front, spot gold has crossed its threshold level of $1,900 per ounce as dollar records pullback. The glitter in gold prices is likely to be positive for gold loan growth. Brokerage Motilal Oswal's analysis has indicated that higher gold prices have led to higher off-take in gold loan demand in the last three months.

On Wednesday, at MCX, gold futures maturing February 3 rose by 97 or 0.17% to end at 56,449 per 10 grams. This was near the day's high of 56,460.

Also, silver futures maturing March 3 picked up by 328 or 0.47% to close at 69,514 per kg. Silver has touched an intraday high of 69,669.

Meanwhile, on the global front, spot gold traded above $1,916 per ounce at the time of writing.

Gold prices have gained traction in recent times as inflation numbers are easing better than expected prompting hopes for smaller size rate hikes and less aggressive policy stances from central banks --- that in return have cautioned bets in the dollar. Last year, gold prices could not witness a potential upside amidst inflationary pressure because the dollar index rallied to a two-decadal high. Gold is seen as a safe haven to hedge funds during macroeconomic uncertainties.

In its latest research note dated January 17, Motilal Oswal said, "while the math might not be as simplistic…, channel checks do indicate that higher gold prices over the last three months have led to a higher off-take of gold loans. The bigger beneficiaries have been banks and gold loan fin-techs, which offer relatively lower-priced gold loans."

Motilal highlighted that from its channel checks in Southern India for gold loan NBFCs in general and Muthoot Finance in particular are --- a) higher gold prices have led to better gold loan demand and are also contributing to a significant decline in gold auctions, b) both Muthoot Finance/ Manappuram Finance have not made any notable changes to their gold loan schemes in Jan’23, which make it unlikely for gold loan NBFCs to re-introduce any teaser-rate loans to accelerate loan growth, c) the competitive landscape still remains highly aggressive suggesting little scope for any marked improvement in spreads/margins beyond what was reported in 2QFY23, and d) Metro cities/Tier-1 towns acknowledge that gold fin-techs such as Rupeek and Indiagold offer lower pricing and are still the biggest competition.

Given that gold loan growth is not easy in such a competitive landscape, the brokerage stated that gold loan NBFCs such as MUTH have prioritized asset quality (yes! something which has always been the least of the worries) through schemes to keep NPAs in check and minimize auctions.

Further, the brokerage added that they did not come across any significant changes in gold loan rates and schemes between the last quarter and now. However, what they found positive is that gold loan NBFCs are unlikely to offer any teaser-rate schemes to accelerate loan growth since they are all now prioritizing profitability over growth.

Notably, both Muthoot nor Manappuram have not reported any significant increase in borrowing costs until Sep’22 aided by maturity of higher-cost borrowings. Motilal's note added, "While some of that advantage could sustain over the next two quarters, we expect an increase in borrowing costs to become more pronounced in FY24. This would also curb any notable improvement in margins given limited ability to effect pricing increases."

Overall, the brokerage's note added, "We believe that the strength in gold prices will sustain in CY23 because of the expected deterioration in the broader macroeconomic indicators both in India as well as globally – a rising tide will lift all the boats!."

Motilal has retained a Neutral rating on Muthoot with a target price of 1,150 (based on 1.8x Sep’24E P/BV). But the brokerage has assigned a BUY rating on Manappuram with a target price of 150 (based on 1.1x Sep’24E P/BV).

 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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