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NON-BANKING FINANCE COMPANIES (NBFC)
q Buoyant economic growth coupled with uptick in domestic demand will
likely continue to lead advances growth on upward trajectory during
Q2FY11
q NIMs of most of the NBFCs are expected to moderate during Q2FY11 as
the interest rates have started hardening
q Capital market intermediaries to benefit from improved volumes, however
brokerage yield to remain under pressure.
q We continue to maintain our positive outlook for the NBFC sector. Top
Picks- IDFC, IIFL.
Buoyant economic growth coupled with uptick in domestic demand
will likely continue to lead advances growth on upward
trajectory during Q2FY11
In the backdrop of continuing steady economic growth during H1FY11 and upward
trend in t, NBFCs have also witnessed strong traction in advances growth. In the
back drop of strong recovery in domestic demand, disbursement growth is expected
to remain buoyant during Q3FY11. We are of the view that steady growth
in individual income will lead to strong traction in retail finance (auto and housing).
Strong housing demand will continue to aid mortgage loan growth for housing finance
companies, however hardening of interest rate and rising real estate prices
may temper business growth. Traction in economic activity will support automobile
demand in India, therefore benefiting auto financing companies-M&M Financial
Services and Shriram Transport Finance. However, hardening of interest rates will
push cost of funds and therefore may impact NIM.
Since infrastructure development remains the key focus area for government; we
opine that the increased budget allocation towards infrastructure development
along with $1-trillion investment envisaged during the twelfth five year plan is significantly
positive for domestic infrastructure financing companies- IDFC and Power
Finance Corporation. We expect healthy growth in disbursement of NBFC-IFC during
Q3FY11.
Net Interest Margin is expected to witness some pressure remain
during Q3FY11 as the interest rates have hardened following
monetary policy tightening; further hardening of interest rates
will continue to impact NIM marginally
During Q3FY11, NIM of NBFCs is expected to witness some pressure following
hardening interest rates at the RBI has tightened monetary policy. We expect some
moderation the NIM during Q3FY11 with the sharp increase in the borrowing cost.
Going forward, we also opine that the tightening of liquidity which has led to
higher interest rates may temper the demand in retail as well as corporate. However,
we expect a healthy growth in business coupled with healthy asset quality.
Asset quality expected to remain healthy during Q3FY11; significant
tightening of liquidity may impact repayment capabilities
leading of risk of rising delinquencies.
On the asset quality performance front, improved economic activity has aided
steady business growth and improvement in asset quality; we expect asset quality
of NBFCs to remain healthy during Q3FY11. However, going forward, we believe
that further monetary policy tightening measures by RBI may temper asset quality
of NBFC; as this will impact the re-payment capacities, leading to increase risk of
defaults.
Capital market volumes improved during Q3FY11 in the cash
segment, commission and brokerage revenues may remain flat,
though
Capital market volumes improved during Q3FY11. Healthy cash segment volumes
on sequential basis will boost average traded volumes of capital market intermediaries.
Overall capital market volumes, though, continues remain highly skewed towards
F&O segment; with continuing pressure on brokerage yield for all the capital
market intermediaries under our coverage - Edelweiss Capital, IIFL, and MOFS.
Therefore, brokerage and commission revenue is expected to remain flattish during
Q3FY11. Also fee based businesses pertaining to the asset management businesses
are expected to remain flattish. Increased activity in the primary capital market will
aid revenue growth from investment banking business.
Earning preview
n HDFC Ltd - During 3QFY11, we expect HDFC's disbursement growth to remain
steady; we expect a 20% yoy growth in mortgaged loan book. HDFC discontinued
the dual interest scheme, while the excess provision in the books (close Rs.
4bn) will help off-set additional provision requirement according to revised NHB
guidelines. Our earnings estimates remain sensitive to higher than expected
treasury gains.
n LIC Housing Finance - Steady retail demand will continue to book the overall
mortgage loan growth, we expect a 32% yoy growth in the advances. Moderation
in the developer's loan expected. We expect some pressure on NIM during
Q3FY11; however, hike in lending rates following increase in borrowing cost
will help preserve margins to some extent.
n IDFC- Infrastructure loan growth is expected to remain strong during Q3FY11
following its strong sanctions, while NIM (3.4%) may witness some pressure following
sharp increase in the borrowing cost (both short term as well as long
term). Fee income from capital market related business and asset management
business is expected to remain flattish on sequential basis. Nonetheless, higher
than expected treasury gains will provide added upside.
n Power Finance Corporation - Advances expected to witness a healthy growth
(25% yoy) during Q3FY11 following a robust sanctions book. Its NIM is expected
to remain stable during Q3FY11 aided by IFC status.
n M&M Financial Service- In the backdrop of healthy automobile sales number,
we opine that disbursement growth for MMFS (cars, tractors, and CV) will remain
strong during Q3FY11. NIM during Q3FY11 is expected to witness marginal
pressure following increased borrowing cost. We expect asset quality to
remain stable, however, improvement in provision coverage and recoveries will
continues to remains vital.
n Shriram Transport Finance- STFC's disbursement growth during Q3FY11 is
expected to remain steady, while its NIM is expected to witness some pressure
following increase in cost of funds during Q3FY11. Accrued securitisation income
on CV will continue to support STFC's core earnings growth. On the fee
income front, we expect income from CV trading business at Rs. 200mn-250mn
during Q3FY11. Asset quality is expected to remain stable.
n SREI Infrastructures Finance - We expect healthy growth in infrastructure
equipment financing as well as infrastructure project financing. NIM is likely to
some pressure - on standalone as well as for JV Company following increase in
cost of funds. Our earnings estimates for SREI Infra remain sensitive to forex
gains on ECB (close to $ 350mn) and FCCB.
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