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Healthy improvement in disbursements and collections

Minor improvement in asset quality will lead to lower credit cost in 2QFY22

* Recovery momentum witnessed in Jul’21 continued well into Sep’21, despite fears of a potential third COVID wave in the early part of 2QFY22.

* 1QFY22 was impacted by the second COVID wave. Relative to 1QFY22, we expect disbursement volumes of 170-230% for most Affordable Housing/Vehicle Financiers. Impact on AUM growth is likely to be higher for short duration products like Vehicle loans as collections held up well in 2QFY22.

* Collection efficiencies were better for Housing Financiers (especially the Salaried segment) relative to other segments. For Vehicle Financiers, or MFIs, we expect CE in the 90-100% range. After the high levels of restructuring witnessed in 1Q, we expect a relatively lower incremental restructuring in 2QFY22E. Among the various product segments, restructuring was the highest in Vehicle Finance and the lowest in Housing Finance. Most companies suggest that they do not foresee the need for further buildup of management overlay provisions in 2QFY22 and would instead see some write-offs/repossession losses during the quarter.

* With a continued moderation in incremental cost of funds, we expect a slight decline (5-10bp) in the weighted cost of funds. Most financiers have started normalizing excess liquidity on the balance sheet, but it still remains elevated compared to preCOVID levels. We expect this to reduce the consequent negative carry in 2HFY22E.

* New margin norms have impacted cash volumes, but the same has been offset by surge in F&O volumes. Capital market players will see a steady increase in revenue. Distribution income is expected to rise, led by higher AUMs. Within the Wealth Management space, inflows are likely to remain steady.

* Both collections and disbursements have held up well in 2QFY22. We expect credit costs to be front-ended in 1HFY22E and a relatively leaner credit cost structure in 2HFY22E. Reported asset quality (GNPA or Gross Stage 3) would remain stable or exhibit a minor improvement. Notably, we do not estimate asset quality deterioration in 2QFY22. We estimate a steady recovery in both demand/asset quality through 2HFY22E. We continue to favor franchises with strong balance sheets and those who have demonstrated resilience during external disruptions. The buoyancy in the equity capital market and higher levels of primary market issuances will continue to remain a tailwind for the Broking industry in the remainder of FY22E as well. Our top picks are HDFC, MUTH and ISEC.

HFCs: Demand buoyancy led to a sharp recovery in disbursements, restructuring has been incrementally lower in 2QFY22

Property registrations continued to witness a sharp recovery from Jul’21 to Sep’21. Good schemes/discounts by developers, demand for own home/bigger home, and record low interest rates will remain the key drivers. The Home loan segment will continue to witness heightened competitive intensity, especially from Banks. While we expect HDFC and LICHF (aided by their lower CoF) to deliver strong Retail Home loan disbursements, others like PNBHOUSI may continue to see relatively modest disbursements, while it aligns to its new business model. We expect overall disbursements to be supported by better Corporate/Developer disbursements for HDFC/LICHF. Affordable Housing Financiers could potentially deliver 165-230% of their 1QFY22 disbursements. Incremental restructuring for Affordable Housingfinanciers in 2QFY22 has been relatively low. We expect aggregate restructuring (including 1.0 and 2.0) for Affordable Housing players to be between 1% and 6%.

Vehicle Financiers – Though not as high as 1QFY22, restructuring was still pronounced in new Vehicle Finance

Business volumes in PVs (particularly Cars) were severely impacted on account of the chip shortage. 2Ws are yet to pick up meaningfully, but the build-up in Sep’21 has been good as we head into the festive season. M&HCV volumes have seen a recovery, but sales are still much below pre-COVID levels. Used CV sales have been relatively healthy due to unaffordability of new M&HCVs, aided by a strong pipeline from 1QFY22. MMFS reported quarterly disbursements of ~INR64.5b (up 67% QoQ on a low base) in 1QFY22. We estimate CIFC/SHTF to deliver relatively better QoQ growth in disbursements. Demand is improving in CVs, but it is still a far cry from pre-COVID levels. We estimate incremental restructuring of 150-200bp for MMFS/CIFC, while incremental restructuring in SHTF will continue to remain relatively lower (40-50bp).

Margins should be stable to improving

Normalized margins should be stable to improving as there were no major pressure on yields, despite only a minor decline in the incremental cost of borrowings in 2QFY22. While most companies have started dialing down excess liquidity on their balance sheets, it is still higher than pre-COVID levels. We expect this excess liquidity to fairly normalize by Mar’22E. The resultant negative carry should also reduce, which will support margins.

Gold financiers – Loan demand was muted (relative to our expectations) with high ticket size customer wins for MGFL; auctioning to remain low

Despite the regulatory arbitrage of higher LTV (90%) ending in Mar’21, Banks have continued to remain aggressive in Gold Financing. To this end, players like MGFL have embarked on offering competitive interest rates to high ticket-size Gold loan customers (ATS over INR0.1m) and have been able to win back such customers from Banks and some of the other Gold loan NBFCs. This will, however, result in moderation in spreads and margin for MGFL. Gold prices were largely flat QoQ (Source: WGC), suggesting that portfolio LTVs of Gold loan NBFCs should largely remain stable. For MUTH, some of the Gold loans disbursed at the peak of gold prices in Aug’20 could come up for maturity/rollover in 2Q/3QFY22. We expect a healthy growth in the Gold loan portfolio for MGFL/MUTH given the various attractive interest schemes introduced by these gold financiers to attract high ticket-size gold loan customers. Since gold prices have been stable, we expect Gold Financiers to offer some reprieve to customers (especially those who continue to pay the interest component) to repay rather than rush to auction off their gold. This could lead to GNPAs remaining elevated during 2QFY22E, but should start declining from 3Q onwards. In the non-Gold portfolio, both MUTH/MGFL have started new disbursements in MFI and Vehicle Finance. Among non-Gold segments, the MFI segment is still the most vulnerable (basis collection efficiencies). We expect credit costs (also led by write-offs) from this segment to remain elevated in 2QFY22E.

Diversified financiers exhibited healthy collections and improving MoM disbursements during 2QFY22

Wholesale lenders continued their focus on existing projects and are still selective in evaluating new projects. For the first time after the COVID-19 outbreak, newer projects have been sanctioned during 2QFY22 and activity in Construction Finance is beginning to pick up pace. For some Real Estate lenders, there could also be potential projects (already in their watch list) which could slip into NPA in 2QFY22, leading to higher provisioning in the segment. While disbursements were strong (back to pre-COVID levels), collections were robust all through 2QFY22, resulting in faster run-off in the loan book. Except for unsecured MSME/Personal loans, we expect collections to improve across product categories for both BAF and SCUF. For LTFH and SCUF, we expect asset quality to remain stable and do not estimate any further build-up in COVID-19/macro provision buffer in 2QFY22. If there are no new waves of the pandemic in the country, it will likely start utilizing the COVID-19 provisions from 3QFY22 onwards.

Capital market cash volumes decline on the back of margin norms

Retail segment cash ADTO fell 13% and 7% on a MoM basis in Jul’21 and Aug’21. Volumes are expected to be impacted further in Sep’21 on the back of implementation of 100% margin norms from 1st Sep’21. However, F&O volumes continue to gain traction (up 24%/6% MoM in Jul’21 and Aug’21), especially the Options segment. Trend in customer acquisition continues to remain strong in 2QFY22. For ISEC, we expect some pick up in revenue in the Distribution business as AUM in MFs has increased on the back of flows, MTM gains, and increase in Insurance sales. IIFLWAM will see steady trends post a stellar quarter in 1QFY22. TBR revenue is likely to remain stable, while ARR revenues will be dependent on traction in IIFL-ONE assets.

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