NBFC AUM to sustain growth in Q3; NIM compression likely

NBFC AUM to sustain growth in Q3; NIM compression likely

The growth in assets under management (AUM) of non-banking financial companies (NBFCs) is expected to have stayed buoyant in the October-December quarter, aided by a strong festive season demand in some segments. However, these entities may continue to witness compression in their net interest margins as cost of borrowings remained high, say analysts.

“We expect the NBFC pack to report a strong operating and financial performance in Q3, driven by stable AUM growth & asset-quality trends,” brokerage firm Emkay Global Financial Services said in a pre-earnings report.

The growth in AUM in the December quarter will be driven by housing finance companies, microfinance lenders, and diversified lenders. Motilal Oswal Financial Services estimates loans of NBFCs to grow 20% year on year and 5% quarter-on-quarter in Q3.

In November, the Reserve Bank of India (RBI) asked NBFCs to increase the risk weights on their exposure to retail loans by 25 percentage points. Housing loans, educational loans, vehicle loans, loans against gold jewellery, and microfinance loans are excluded from this measure.

The move came against the backdrop of increased concerns over the rapid growth in unsecured retail loans and higher delinquencies in small-ticket personal loans. Following RBI’s move, lenders have started calibrating their growth in unsecured personal loans, particularly those sourced through digital partnerships.

The new vehicle sales data in December show that while two-wheeler sales remained robust, tractor and commercial vehicle sales witnessed a decline. Passenger vehicle sales were also muted. Hence, the growth in vehicle loans and personal loans will be the key to the growth of NBFCs going ahead, say analysts.

Bajaj Finance’s provisional numbers indicate that its assets under management rose 35% YoY to Rs 3.1 trillion as on December 31. Similarly, assets under management of Poonawalla Fincorp rose 57% to Rs 21,850 crore.

“We remain constructive on vehicle finance and expect mortgages to benefit from a recovery in both supply and demand,” Motilal Oswal Financial Services said in a report.

Separately, the RBI also asked banks to increase the risk weights on their exposure to NBFCs by 25 percentage points in all cases where the extant risk weight as per external rating of NBFCs is below 100%. This has led to a rise in the cost of borrowings of NBFCs as they are compelled to borrow funds from banks at a higher rate or tap other avenues for funding, say analysts.

“NIMs are likely to remain under pressure as borrowings become expensive due to a rise in risk weights for banks towards NBFC lending, increase in capital charge as NBFCs have to maintain higher risk weights for unsecured consumer loans,” Centrum Broking said in a report. “Transmission of repo rate hike continues with reset in MCLR rates and refinancing of bond market borrowing.”

While NBFCs have increased interest rates, it may not be sufficient to compensate for the increase in borrowing cost. Despite the moderation in margins, the strong AUM growth is expected to aid the net interest income of these entities.

But, continued strong collection trends and seasonal improvements should drive sequential improvements in non-performing asset trends, and help keep credit costs under check. Hence, NBFCs are expected to post a healthy profitability in the reporting quarter, say analysts.

“Opex is likely to remain stable, resulting in operating profits to hold on. We build in stable/marginal improvement in credit costs this quarter as we do not witness any major deterioration in asset quality,” said Centrum Broking.

“We continue to prefer franchises that can manage their liabilities better than others to mitigate the impact on margins and companies with strong balance sheets and higher visibility on earnings growth,” said Motilal Oswal Financial Services.

Specifically, Shriram Finance, Home First Finance, UGRO Capital, and L&T Finance Holdings are among analysts’ preferred bets.