Published on 23/02/2021 12:02:55 PM | Source: Emkay Global Financial Services Ltd

Banking and NBFC Sector Update - Ears to the ground: From new normal to super normal By Emkay Global

Posted in Broking Firm Views - Sector Report| #NBFC #Emkay Global Financial Services Ltd. #Sector Report

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Ears to the ground: From new normal to super normal

* HFCs/NBFCs’ market share losses in housing continue; private auto segment too joins the trend: The trend of consistent market share losses for NBFCs to Banks is continuing, especially in housing and private auto segments (see Exhibit 11-13). Due to lower interest rates and longer loan tenures, customers are favoring banks over NBFCs. Recent commentary from MMFS and CIFC about losing market share in the private car segment to SBI is another interesting outcome. NBFCs continue to bet on the underbanked and new-to-credit segments to manage growth momentum while also focusing on specific product segments such as used vehicle finance, affordable housing and low-ticket MSME loans.

* Credit momentum upbeat; mortgages, used vehicles and MSME loans in focus: Our recent discussions with various NBFC management and industry experts point to a surge in credit demand across sectors and geographies. New housing loans (especially in the affordable category), used vehicle loans and MSME loans are seeing significant momentum, followed by auto and 2Ws, while the cautious stance stays regarding unsecured loans. Demand for MHCVs and tractors is also witnessing initial signs of a quick rebound. The introduction of the scrappage policy is expected to accelerate used vehicle demand further.

* Liability profile witnessing diversity; margin improvement is here to stay: We can easily identify the diversity in liability profile for NBFCs, along with surprising trends in the marginal cost of funds. NBFCs with strong parentage, such as HDFC, Bajaj Finance and LICHF, have reported marginal incremental cost of funds in the range of 5-5.5%, which is historical low. Recent primary issuances data indicate that due to surplus liquidity in the system, BAF and HDFC have recently raised two-year paper at ~4.5% (cheaper than twoyear bank deposits; see Exhibit 16-20). The shift toward MCLR-linked bank borrowing has also aided in trimming the cost of funds. With the elevated share of fixed-rate lending, margin improvement is here stay for most NBFCs.

* Asset-quality pain is not over yet; steep rise in Stage-2 assets remains a concern: We specifically remain concerned about the steep rise in Stage-2 assets, along with probable write-offs in Q4. Our discussions with NBFC management indicate that rise in Stage-2 assets is due to normalization of business after two quarters of moratorium, which is expected to ease out in the coming quarters. Also, managements are avoiding shift in portfolios from Stage 2 to Stage 3 (NPA) - also keeping overall pool of Stage-2 assets elevated. On the collection efficiency side, though collections against current month bill had seen significant improvement, collection toward arrears is still lagging for most lenders.

* Restructured assets under control; ECLGS lending remains grey area: Restructuring trends have remained fairly limited for most lenders, at an average of 3-5% of AUM. Most NBFCs have given 60-180 days of principal moratorium, along with tenure extension for the restructured portfolio. ECLGS is disbursed on the basis of pre-Covid track record of customers and in a secured manner vs. a free asset. But considering one year of principal moratorium and rise in lending to existing stressed customers, it remains a grey area for now as the overall outcome of this portfolio would be visible only after some quarters.

* Tightening of RBI regulations - a step in the right direction: With the RBI increasing its vigilance over NBFCs, restricting dividend payouts, etc., we believe it will result in enhancing governance structures of NBFCs, and bring more transparency and lesser leverage based growth – leading to an improvement in cost of funds and credit costs.

* We continue to like promoter-backed, moat driven, well-governed NBFCs/HFCs with a stable liability franchise. CIFC (Buy; TP of Rs550) remains our top pick, followed by HDFC Ltd. (BUY; TP of Rs3,020) and SHTF (BUY; TP of Rs1,595). We like PFC (BUY; TP of Rs210) too on the back of recoveries, Atmanirbhar disbursements and improving asset quality. We remain watchful of BAF’s (Hold; TP Rs5,400) growth trajectory and trends in the flexi loan book.


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