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Healthy profitability despite NIM restraint from rising CoF

Mortgages and gold loans yet to fully recover; minor improvement in asset quality

* Robust credit demand leading to healthy AUM growth: We expect ~8% YoY growth in AUM for our coverage HFCs, including both affordable and other HFCs. Vehicle Financers are projected to report ~26% YoY growth in AUM. Gold lenders (including non-gold products) are expected to report a ~25% YoY growth. NBFCMFIs are forecasted to report a ~35% YoY growth, while diversified lenders are anticipated to deliver a ~24% YoY growth in AUM. For our coverage universe, we estimate a loan growth of ~20% YoY/~5% QoQ in 3QFY24. Lenders acknowledged that they have started calibrating their growth in unsecured personal loans (PL; particularly those sourced through digital partnerships).

* NIM trajectory remains an important monitorable: The extent of NIM recovery envisaged earlier in Vehicle Finance (VF) has not happened as yet because of the sustained rise in CoF, which might now peak by Mar/Jun’24. For Housing Financiers, yields have maxed out (except for a change in product mix) and rising CoF would result in a sequential NIM compression.

* Expect operating cost ratios to remain broadly stable: NBFCs/HFCs have been investing in either technology/analytics infrastructure or in branch expansions. We expect operating cost ratios to remain sequentially stable with an improvement bias.

* Asset quality exhibited minor improvement: We expect a minor improvement in asset quality in Vehicle Finance as well as mortgages. MFI lenders could see some slippages during the quarter, resulting in asset quality remaining more range-bound. We do not expect any higher delinquencies in affordable HFCs. Credit costs likely to remain benign, except for a) provisions for slippages from restructured pool and b) write-offs in the PL portfolio.

* Healthy profitability despite NIM moderation to result in ~27% YoY PAT growth for the NBFC coverage universe: We estimate a ~22%/22%/27% YoY growth in NII/PPoP/PAT in 3QFY24 for our coverage universe of NBFC – Lending Financials. We remain constructive on Vehicle Finance and expect mortgages to benefit from a recovery in both supply and demand. We continue to prefer: a) franchises that can manage their liabilities better than others to mitigate the impact on margins and b) companies with strong balance sheets and higher visibility on earnings growth. Our top picks in the sector are SHTF, PNBHF, and Fusion MFI.

Mortgages yet to fully recover; new housing scheme to aid demand

* Demand for mortgages in the affordable housing segment, with ticket sizes below INR3m, has shown limited recovery and remains relatively weak. However, there has been healthy demand observed for low-ticket mortgages within the range of INR1.0-1.5m, particularly for self-construction purposes. CANF (with an incremental ATS of ~INR2.2m in housing loans) could see muted disbursements in the quarter because of a) a delay in demand recovery and b) management bandwidth spent in process improvements.

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