MARGIN IMPACT TO VARY ACROSS NBFC SEGMENTS

Firms with strong parent support, high asset re-pricing ability are better placed

Stocks of non-banking financial companies (NBFCs), including housing finance companies continued under selling pressure on a fifth trading session in a row. Even the primary market felt the heat, with Aavas Financiers’ initial public offering of equity getting relatively lower demand.

Analysts at Edelweiss Securities say incremental liquidity is likely to be expensive, with the recent downgrade of AAA-rated (which denotes highly safe instruments or companies in terms of default) IL&FS taking a toll on near-term margins and loan book growth of NBFCs. Also, companies having more shorttenure debt market borrowing (and close to maturity) would feel sharp pressure on margins. They have slashed net interest margin estimates for NBFCs by 15-30 basis points and asset growth by five to seven percentage points. The impact could vary within the NBFC segments, depending on asset repricing ability and pricing power, say analysts.

HFCs

Housing Finance Companies (HFCs) are expected to be affected the most, as many companies’ debt would be maturing in the near term. Though many home loans are on a floating interest rate, heavy reliance on incrementally costlier debt-market borrowing and weak pricing power is a double whammy. Also, typically, housing loans are for a longer duration; hence, they cannot excessively rely on short-term funding. And, experts believe market participants are unlikely to invest in long-term papers or debentures with a high yield trajectory, spoiling loan growth. Also, HFCs with a credit rating below AAA, such as Repco, would see more margin deterioration. But, companies that have strong parent support and a high credit rating, such as HDFC, are expected to fare better.

Auto financiers

Vehicle lenders could be hit, as they are likely to see additional pressure in terms of loan growth with running costs due to rising fuel prices and higher purchase costs (insurance). Two large entities – Mahindra & Mahindra Financial Services (MMFL) and Shriram Transport Finance Company (STFCL) – are expected to do relatively better. While MMFL, a rural-focused commercial vehicle financier, has strong parental support and has better pricing power (than HFCs), STFC has strong asset-liability management and pricing power (it is the market leader in used vehicle financing), say analysts. Beside, says Ramesh Iyer, vice-chairman of MMFL, cost pressure can be shared between original equipment makers, dealers and financiers, beside borrowers, to protect demand if the consumer is not ready to pay a high rate of interest.

Gold financiers

Major players here have a credit rating below AAA, indicating higher incremental cost of funds. Positively, these companies have higher asset repricing ability, as the typical asset tenure for them is short (less than one year). “With low competition, gold finance companies have good pricing power and can pass on the cost burden more quickly as compared to HFCs or vehicle financiers. They would be able to deal with cost/margin pressure but with a time lag,” says an analyst at a domestic brokerage.

“We rely more on short-term borrowing but considering that the typical gold loan is repaid within three months, we are quite well placed as far as asset liability management is concerned. With no real competition in its class, it is easier to adjust the lending rates upward to reflect current costs,” says V P Nandakumar, chief executive at Manappuram Finance. Diversified NBFCs could get some support, as the risk would be spread over multiple segments. Companies like Shriram City Union also have good bargaining power in terms of lending rates, say analysts. However, the assetliability mismatch for diversified financials will continue to be a key monitorable.