Banks now have the advantage over NBFCs
The liquidity crunch faced by the NBFC sector is expected to give banks an upper hand. HAMSINI KARTHIK writes
For banks, one man’s loss may prove to be another’s gain. The liquidity crunch faced by the NBFC sector is expected to give banks an upper hand in terms of broad-basing their presence in the retail space and expanding their loan base.
Analysts factor 15 -20 per cent loan growth for private banks and 8-10 per cent growth for public sector banks. However, the trend in other income could remain shaky for most of FY19. “Other income for banks will continue to suffer on moderate treasury income, keeping operating performance volatile,” says Pritesh Bumb of Prabhudas Lilladher.
Operationally, as competition from non-banking lenders may wean, it could put banks in a better position to pass on the rising cost of funds. But, this doesn’t fade the concerns around a possible decline in profitability. “Net interest margins (NIMs) are likely to shrink further as the lending portfolio will re-price largely over second half of FY19, while cost of funds has been on a rise and CASA (current account-savings account) mix has been under pressure across most banks,” analysts say. Yet, the sector as a whole should benefit from the peaking of asset quality cycle.
As experts suggest, for banks, the game will now be about resolution and not recognition of bad loans as seen in the past. “Asset quality should be steady across the sector with no shocks on slippages and see some recoveries from NCLT (National Company Law Tribunal) referred accounts,” Bumb adds. Consequently, the sector including the state-owned entities are expected to post decent net profit starting December quarter.
Overall, with the tide turning in favour of banks, ICICI Bank and Axis Bank, which have a decent mix of retail and wholesale loans, feature among the top buys in the sector.
HDFC Bank and IndusInd Bank, after the fall from end-August, also appear attractive for most brokerages.
NBFCs
Multiple headwinds still await NBFCs and most of it is a cascading effect of money becoming dearer.
While much of the ongoing liquidity crunch may not reflect in September quarter results, analyst don’t expect the remaining fiscal to be smooth for these lenders. Analysts at Credit Suisse estimate that the mutual fund (MF) industry could pare its exposure to NBFCs by 10 percentage points over the next two months. “With more than half of MF exposure to NBFCs through shortterm commercial papers, the next few months will be challenging for NBFCs,” they warn. Consequently, they envisage the overall credit offtake to fall below the 10 per cent mark in FY19 if NBFCs slow down their loan book expansion due to constrained fund availability.
Additionally, Suresh Ganapathy of Macquarie Capital says that if access to short-term paper is cut off, the impact on return on equity (ROE) could be around 3 percentage points for the NBFC sector. “The eventual sustainable ROE will come down from 18-20 per cent to 15-17 per cent if there are tougher restrictions to asset-liability management, restricted access to short term funding and higher requirements of equity.”
In the near-term, though, a decline in loan book could have a deeper implication on the financials of NBFCs. That market leader HDFC raised 10-year funds at 9.05 per cent recently (80 basis points higher than usual) is an indicator of how capital is turning expensive.
Therefore, while analysts say the extent of pain is early to comprehend, 50–100 basis point shrinkage in NIMs seems likely. Also, as growth gets restricted, it could put pressure on the asset quality of the financiers.
With these concerns in place, most analysts have turned negative on the sector and instead prefer banking names. “Whether the pain will last for a quarter or go beyond, is the biggest uncertainty for NBFCs,” says Sidharth Purohit of SMC Global. Despite the fall, valuations are still not cheap, so NBFC stocks could remain under pressure, at least till the clouds clear.