EUR 120.00 For Business Accounts Only

MOSL: FINANCIALS – NBFC | 2QFY23 PREVIEW: Healthy loan growth and stable asset quality

.  Financials – Nbfc | 2QFY23 PREVIEW: Healthy loan growth and stable asset quality

• We expect our coverage universe of NBFC - Lending Financials to deliver 16% /16%/21% YoY growth in NII/PPoP/PAT, respectively, in 2QFY23. While we forecast a strong YoY earnings growth for BAF, SHTF, and LICHF, we estimate a YoY decline for MMFS (because of higher credit costs than the base quarter) and MUTH (driven by moderation in loan growth and relatively lower margins).
• While the narrative around a sharp spike in short-term interest rates has gained headlines, it has not adversely impacted the margins for our NBFC coverage universe because of lower proportion of short-term borrowings and well-matched fixed rate assets/liabilities.
• Seasonal weakness in asset quality, usually expected in the 1H of the fiscal year, was notably absent in 1HFY23. We expect asset quality to remain broadly stable for the vehicle financiers (with MMFS having already reported a ~270bp QoQ improvement in 30+ dpd) while we expect HFCs to report a minor sequential improvement (except for LICHF, where we expect slippages from the restructured pool).
• Discussions with NBFCs/HFCs seem to suggest that while the incremental cost of borrowings (CoB) have gone up by 50-70bp, the weighted average CoB has increased by 15-30bp QoQ. Companies with high liquidity on their balance sheets now have lower levels of surplus cash and will benefit from the reduction in the negative carry.
• Large HFCs, particularly HDFC, have raised their prime lending rates (PLRs) to transmit the increase in repo rates to customers. However, the affordable HFCs have been measured in increasing their lending rates and while they have managed to maintain stable spreads in 1HFY23, we expect them to partly absorb the higher borrowing costs in 2H. For the cohort of vehicle financiers, we expect margins to sequentially decline by 10-20bp with the least impact on SHTF, followed by CIFC and MMFS. For the gold financiers, we expect NIMs to improve by 60-80bp QoQ, driven by higher blended yields, partly driven by their focus on lower ticket sizes and partly by the run-off in the higher-ticket lower yield teaser rate loan book.
• Disbursements continued to remain healthy across vehicle and housing finance, driven by strong demand and sectoral tailwinds. We expect a ~14% YoY/3.5% QoQ loan growth in 2QFY23 for our coverage universe. Gold loan demand has still not picked up in the lower ticket size (
• RBI has affected repo rate hikes of 190bp between May and Sep'22. What generally gets discussed is the impact of rising interest rates on the margin profile of the NBFC/HFCs. However, we are of the view that further repo rate hikes of 50-70bp are possible in 2HFY23, which can negatively impact the demand for mortgages if banks/large HFCs continue to transmit the entire repo rate increase to their customers. Until now, the natural recourse has been to increase the tenure when the PLR was increased. However, with the likely 50-70bp increase in repo rates in 2HFY23, the lenders would now need to start increasing the EMIs which could also lead to higher delinquencies.
• We continue to favor: a) franchises with strong balance sheets and b) those companies that can change their asset/liability mix to mitigate the impact on margins. Our top picks are CIFC, MMFS, and HomeFirst.

HFCs: Minor improvement in asset quality and small sequential growth in disbursements across large and affordable lenders; HDFC will continue to exhibit transitory impact on NIM

• Home loans have continued to experience healthy demand despite increasing interest rates amidst inflation concerns. We expect HDFC and LICHF (aided by their lower CoF) to deliver strong retail home loan disbursements. HDFC has seen some resolutions in the non-individual book through sale to ARC, leading to an improvement in asset quality but which will also keep the non-individual loan growth muted. We expect that the transitory impact on margins, owing to the lag in transmitting higher borrowing costs to the customer, will continue in 2QFY23 as well.
• While we expect asset quality to improve for HDFC (with sequential decline in credit costs), we model slippages from the restructured loan pool for LICHF.
• We expect Affordable Housing Financiers (AHFCs) under our coverage to report a minor sequential improvement in disbursements in 2QFY23. AHFCs have been able to maintain largely stable spreads in 2QFY23 on the back of smaller quantum of interest rate hikes mitigating the impact on weighted average borrowing costs. We expect asset quality to improve for the housing financiers, leading to an improvement in GS3 and the 1+dpd metrics.

Vehicle Financiers - Strong disbursements; margin impact remains limited

• MMFS has already reported its quarterly disbursements for 2QFY23 at ~INR117.5b (up 24% QoQ). For SHTF, we estimate disbursements to remain broadly stable sequentially, while we expect a 13% QoQ growth for CIFC.
• PVs (particularly cars and UVs) continue to exhibit strong demand as is evident from their long waiting periods. M&HCV volumes have continued to demonstrate recovery in the last six to nine months. Used CV sales also have continued to benefit from the momentum in the sales of new commercial vehicles.
• MMFS has reported a ~100bp QoQ improvement in its GS3 (despite the impact on repossessions, following the RBI ban in the last week of the quarter). For CIFC and SHTF, we expect asset quality to exhibit minor improvement (or remain stable). Vehicle financiers as a cohort still remain the most vulnerable to margin compression in 2HFY23, but the impact in 1HFY23 has not been insignificant.

Gold financiers - Gold loan growth still muted but expect yields/margins to improve leading to improvement in profitability

• Demand in the lower-than-INR100K ticket segment has still not improved and banks/gold loan fintechs continue to remain aggressive in the ticket-size above INR100K.
• While we expect a sequential decline of ~2%-3% in the gold loan portfolio for MGFL, we expect it to grow ~2% sequentially for MUTH. Yields have started to improve for both MUTH and MGFL, driven by their focus on lower-ticket, high-yield gold loans and run-off in the low-yield teaser rate loan portfolio. For MUTH/MGFL, we expect NIM to improve by 80/60bp QoQ, leading to improved profitability.