Non-banking financial companies (NBFCs) are expected to see healthy profit growth despite net interest margins (NIM) moderating in the third quarter of FY24, analysts said.
While loan growth remains robust, asset quality is also likely to see minor improvement during the quarter.
According to Motilal Oswal Financial Services, the robust credit demand is likely to lead to healthy asset under management (AUM) growth for NBFCs in the October-December 2023 quarter.
Overall, the brokerage estimates a loan growth of around 20% YoY and 5% QoQ in Q3FY24 for NBFCs.
Analysts believed that the core growth drivers including activity levels, CV utilizations, small business credit demand remains steady, but growth in unsecured personal loan and credit cards segment should moderate as lenders curtail lending to this segment due to rising risks, higher risk weight and RBI’s nudge to lenders to exercise caution towards this segment.
The brokerage firm further highlighted that the extent of NIM recovery envisaged earlier in Vehicle Finance (VF) has not happened as yet because of the sustained rise in cost of funds (CoF), which might now peak by March/June 2024.
For Housing Financiers, yields have maxed out and rising CoF would result in a sequential NIM compression.
“We do not expect any higher delinquencies in affordable HFCs. Credit costs are likely to remain benign, except for provisions for slippages from restructured pools and write-offs in the personal loan portfolio,” Motilal Oswal said.
Also, amid RBI concerns over a high share of bank lending, non-banking finance companies (NBFCs) owed close to 57% in Q2FY24 (similar levels in FY22) to banks followed by 18.6% (17.3% in FY23) to MFs and 16.6% (17.6% in FY22) to insurance companies, according to CareEdge Ratings.
The composition of larger NBFCs has started to change a bit as they have tapped the capital market, while mid-sized and smaller NBFCs unable to access the capital market at cost-effective rates have continued their reliance on the banking system as the primary source of funding.
Motilal Oswal expects healthy profitability despite NIM moderation to result in around 27% YoY PAT growth for the NBFCs. Net Interest Income (NII) is estimated to grow 22%, while pre-provisions operating profit is also seen to be growing 22% YoY.
Notably, key players like Bajaj Finance, Mahindra Finance, and Poonawalla Fincorp reporting substantial credit growth.
Bajaj Finance and Mahindra Finance reported an impressive increase of 35% and 25%, respectively, in their assets under management.
Poonawalla Fincorp, with a smaller asset base, outperformed expectations, boasting an outstanding 57% year-on-year growth.