UBS Investment Research: India Banking & Financial Sector: Beyond banking
Non-banking financial companies are niche plays on high growth themes
We believe a strong growth outlook and improved access to capital over the past
12 months have made the non-banking financial company (NBFC) segment
attractive. Despite being cyclical, well-run NBFCs have created profitable niches
of their own. Peaking margins could be a near-term concern, but structural demand
and a low-cost model will support high growth and profitability, in our view.
Five reasons why we think NBFC business is in a sweet spot
1) The growth outlook is strong; we forecast a 26% loan book CAGR compared
with 20% for banks.
2) Concerns on NIMs are overdone, in our view, as we
believe strong asset liability management should support NIMs.
3) Regulatory costs are lower than for banks.
4) There is inherent operating leverage due to the
low-cost operating model.
5) ROAs and ROEs are high; NBFCs have a more
profitable model than banks, but are also riskier.
Rising interest rates unlikely to be a problem
We believe the impact of a moderate interest rate increase on NIMs, demand, and
asset quality is manageable, due to efficient asset liability management and
structural drivers.
Valuations not cheap; time to differentiate: we prefer SHTF and REC
With valuations 16% above the five year average, a significant amount of potential
upside appears to be priced in. However, we believe NBFCs with strong
competitive positioning and a stable cost of funds will continue to outperform the
from banks, and a strong funding base. We initiate coverage of Shriram Transport
Finance (SHTF), Rural Electrification Corp (REC) and Power Finance Corp with
Buy ratings, and LIC Housing Finance with a Neutral rating.
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