Non-banking finance companies (NBFCs) are poised to report robust net profit growth ranging from 20% to 30% in the second quarter ended September 2023 on strong loan disbursements, even though margins may experience some pressure due to an increase in the cost of funds.
Analysts expect Q2 to be favourable for NBFCs, with buoyant disbursement and Assets Under Management (AUM) growth in focused segments. Furthermore, collection trends and asset quality are expected to remain stable, although a few players may encounter a slight compression in net interest margin (NIM) due to a marginal rise in funding costs and changes in asset mix.
According to Motilal Oswal Financial Services, non-bank lenders are projected to see a 26% year-on-year increase in net interest income and a 35% year-on-year rise in net profit for the September quarter.
The July-September result season for non-bank lenders will commence with Jio Financial Services on Monday.
The growth levers
Consumer-facing sectors, including microfinance, consumer durable, and vehicle loans, are predicted to lead the growth among NBFCs. However, affordable housing and gold loan companies may lag behind their peers, primarily due to increased competition and a decrease in the price of gold.
Motilal Oswal anticipates that the NIMs of gold loan companies like Manappuram Finance and Muthoot Finance could decline by 5 to 10 basis points due to heightened competition. Diversified lenders operating in segments such as MSME, two-wheelers, microfinance, consumer finance, pre-owned cars, and personal loans are expected to experience healthy disbursement momentum with minimal impact on NIM and improved asset quality.
Cholamandalam Investment & Finance Co, Fusion Microfinance, and Mahindra & Mahindra Financial Services are top picks in the sector, according to Motilal Oswal. Emkay expects margins to expand for Piramal Enterprises and Poonawalla Fincorp due to improved cost of funding and lower borrowing costs.
While the sector overall appears strong, management commentary on growth and asset quality outlook will be closely monitored, particularly concerning capital raising by some NBFCs and concerns about an increase in stress in retail unsecured lending.
AUM growth
AUM growth among NBFCs is expected to stay strong in July-September, supported by increased demand for loans and diversified business models. Although net interest margins may face some pressure due to rising costs, this is unlikely to significantly impact overall earnings.
“AUM growth is likely to remain strong across NBFCs and Affordable Housing Finance Companies due to buoyant underlying demand and multi-line businesses built by NBFCs,” Centrum Broking said in a report.
Analysts anticipate strong disbursements across product segments, with vehicle finance companies and microfinance lenders potentially having an advantage over niche segments like mortgage loans and gold loans.
Vehicle financiers
Vehicle finance companies are expected to maintain strong domestic volume growth, as challenges such as supply constraints and raw material inflation have either receded or been resolved.
While the net interest margin of NBFCs is expected to compress by 6-13 basis points quarter-on-quarter (QoQ), the margins of vehicle financiers may stabilise in July-September.
Both gold loan companies and affordable housing companies may experience a slight compression in margins due to higher funding costs. However, an improvement in cash flows is expected to contribute to better collection efficiencies and result in benign credit costs across most NBFCs in July-September.
Asset quality to remain stable for NBFCs and HFCs with stage 3 assets remain constant on QoQ basis which rose during FY22 due to RBI new regulations for NPA reporting,” IDBI Capital Markets and Securities said,
Analysts remain vigilant about delinquencies in unsecured portfolios in personal loans and micro, small, and medium-sized enterprise (MSME) segments.
