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FINANCIALS - SFBs, NBFCs, HFCs & Ratings

Asset book composition would dictate Growth and RoE performance for our Coverage Companies in Q3 FY25 as the performance divide between secured and unsecured loan products would remain stark and even within various secured products the performance would differ. Within Unsecured, Microfinance would remain the weakest segment with portfolios markedly contracting for third consecutive quarter and credit cost exacerbating. Elevated provisioning would continue in PL and Cards along with further tightening of acquisitions and book growth. Vehicle Financing could likely see a small growth revival with better disbursement trends in PV, Tractor, 2W and Used Vehicles, partially aided by the festive season. However, credit cost in vehicle finance may not materially improve on sequential basis. Growth momentum in Affordable Housing has been intact, aided by distribution augmentation and productivity improvement. Prime HFCs could witness a loss of business momentum due to issues in key markets of Karnataka and Telangana. Credit cost across most HFCs should remain moderate with stable or slightly improved delinquent pool and controlled NPL addition. We assess least risk to our current FY25/26 earnings estimates for Muthoot Finance, Bajaj Finance, Home First, Aavas Financiers, Aptus Value Home and Ujjivan SF

We expect following dynamics during Q3 FY25 in each lending segment

*Microfinance disbursements would be muted yet again due to collection challenges, sustained high attrition of loan officers, impact from MFIN’s additional guardrails, and increased funding caution by lenders. We expect the Group MFI portfolio to decline by 1- 8% qoq across most of the Microfinance players (incl. SFBs). We expect coverage NBFCMFIs and Microfinance-facing SFBs to further cut growth outlook for the year. While fresh delinquency creation (gross PAR addition) would remain elevated, the slippages, write-offs and credit cost would be higher than Q2 FY25 due to swelled SMA buckets as at the end of September. Credit cost guidance for the year would likely be raised by most players.

One positive trend emerging in recent months has been gradual improvement in Regular/Current bucket collection efficiency. If this sustains in Q4 FY25, then it would imply the abatement of cycle. In such case, we would prefer players with lower PAR, upfront recognition and provisioning policies and having much lesser funding and regulatory constraints. These players are CREDAG, Ujjivan SFB and Equitas SFB.

*Affordable Housing Financiers are likely to report unchanged disbursement and portfolio growth momentum with stable or slightly improved delinquent pool. Growth remains driven by distribution augmentation and productivity improvement amidst firm demand from the targeted customer segment. While CoF would continue to inch-up across AHFCs, the

*Affordable Housing Financiers are likely to report unchanged disbursement and portfolio growth momentum with stable or slightly improved delinquent pool. Growth remains driven by distribution augmentation and productivity improvement amidst firm demand from the targeted customer segment. While CoF would continue to inch-up across AHFCs, the portfolio spread movement would depend on the timing of recent PLR hike (Aavas to report improvement, while rest could post a small spread decline). Credit cost would likely be normal with NPL addition under control. AHFCs could re-rate on sustained strong growth and asset quality performance, and corrected valuations. Prefer Home First and Aptus.

*Prime HFCs like Can Fin, LIC HF and Repco are expected to report weak disbursements in the quarter due to issues in Karnataka (slowed registration) and Telangana (slowdown in Hyderabad due to demolition of unauthorized properties). These players would continue to report modest loan portfolio growth. Margins, asset quality and credit cost would be stable.

*In Vehicle Finance space, MMFS has reported an improved disbursement growth for the quarter aided by festive fervor in PVs and sustained uptick in tractor market. Expect Chola to also report an improved growth in disbursements aided by sustained strong traction in used vehicle and 2W financing and some revival in PV financing. Portfolio growth of Shriram Finance in used CV and PV financing would remain steady due to unchanged underlying drivers. Expected correction in Stage-2 and Stage-3 assets could be elusive with collections not picking up as envisaged in the quarter. We remain positive on Shriram and Chola while would monitor incremental revival in disbursements for MMFS to turn positive.

*Gold Loans NBFCs are witnessing improved customer acquisition/reactivation underpinned by focused growth activity, lessened aggression by PSU Banks, blunted competition from IIFL Finance and tighter availability of unsecured credit. The portfolio growth would also be aided by the increase in gold price during the quarter. We expect much stronger performance from Muthoot versus Manappuram with a likely 4-5% qoq loan portfolio growth, firm yield & margin, and an overall steady credit cost.

For our Rating Agencies coverage, we expect continuance of brisk growth momentum in Domestic Ratings business supported by sustained healthy activity in Bond and Securitization segments. In case of CRISIL, we expect reasonably strong growth in GAC, GBA and MI&A businesses also and possibility of significant margin expansion on sequential basis. In ICRA, we expect weak trend continuing in Knowledge Services (Moody’s outsourcing) and operating leverage in Ratings. In CARE, the key expectations are of further improvement in loss margin of non-ratings businesses (Analytics and Advisory) and margin uptick in Ratings.

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