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We met with over twenty investors in Asia last week, to discuss NBFC, Insurance, and other financial services stocks. Key takeaways: 1) Easing of the regulatory environment in both—the NBFC and Insurance spaces, and growth impetus by the regulators and the government, set the platform for stronger performance in H2FY26. 2) Performance delivery in Q1 (and possibly in Q2) by NBFCs (in AUM growth, asset quality, and credit cost) and Insurers (in terms of growth) is not too encouraging. 3) MFI revival and unsecured PL stress being largely behind is now a consensus view; however, revival in vehicle sales is key for a sustained growth revival. 4) Regulatory changes and the related noise could cause higher near-term volatilities in capital market-linked stocks, albeit provide attractive entry points. Overall, investors see the NBFC, Insurance, and capital market sectors as structural stories; shares’ outperformance in recent quarters seems to be capturing the H2 revival and limits any near-term upside.

Improving external environment and easing regulation drive optimism for H2

Amid a frontloaded 100bps repo rate-cut by the RBI in CY25, reversal of increased riskweight on banks’ loans to NBFCs, and far more benign regulations on provisioning in Project Finance, investors see such regulatory easing supporting the improving performance of NBFCs in terms of growth and profitability (led by NIM expansion), albeit with some lag. Additionally, the better temporal and spatial distribution of the monsoons so far supporting rural revival and the government’s numerous initiatives giving impetus to growth are likely to support credit demand. In Insurance (both Life and GI), growth is expected to recover in H2 on account of the previous-year base turning favorable, the impact of regulatory changes (surrender regulations for Life and 1/n regulations for GI) now behind, and possibly some supportive regulatory actions on the GST front. For capital markets, evolving regulatory actions and the related noise will increase volatility in the near term.

Softer trends in Q1 for Insurers on expected lines; NBFCs throw up a mild negative surprise

The impact of a host of factors—including regulatory changes in the previous year, a buoyant equity market led strong ULIP show in Q1FY25, and no Motor TP Tariff hike in FY26—meant that expectations from Insurers (Life and General) were already muted; hence, a weaker Q1 growth performance is not surprising. In case of NBFC lenders, regulatory actions were expected to translate into improvement in H2, credit costs were expected to see YoY improvement given that Q1 last year was affected by the extreme heat wave and electoral activities. However, trends so far and the management commentaries seem to be indicating a sticky credit cost, akin to levels seen last year – this has come as a disappointment.

Recent rally in share prices and a host of upcoming issues limit near-term upside

Overall, investors were hopeful about a likely revival in the operating performance of lenders and insurers in H2, on the back of regulatory easing and an improving macroeconomic environment. However, due to the strong relative outperformance of NBFC and Insurance shares in recent quarters, and amid several primary issuances in the lending space, the near-term upside is now limited. Against this backdrop, investors are likely to see valuation resistance in BAF and CIFC, as incremental data points are not sufficient for further re-rating. ABCAP’s recent re-rating was appreciated, as the management’s track record of managing credit cost amid big credit events (Wholesale credit crisis 2018-19, Covid 2020-21, and Retail unsecured cycle in 2024) and the likely NIM expansion on re-risking of the balance sheet support 2x P/B FY27E valuation for ABCAP. For insurers, likely approval of the Insurance Amendment Bill in the upcoming monsoon session of the Parliament and GST rate cuts in Term and Health Insurance could be the positive triggers. Against such a backdrop, MAXF and SBILIFE continue to find favor with investors, as Axis-Max rebranding and opportunities thrown up by the Insurance Amendment Bill are likely to support valuations. On the Capital Markets front, the view was slightly different, wherein expectations of regulatory changes and the related noise in the near term are likely to bring higher volatilities in share prices; however, this could also provide attractive entry points to play on decadal stories

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