NBFC-Gold Loan Company - Gold loans lose sheen on LTV cap; ::Edelweiss PDF link

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RBI in its recent guidelines for NBFCs lending against gold has capped LTV at 60%, among various other measures, to protect risks emanating to the financial system given rapid growth in gold loans. Near term impact will emanate from lower growth as AUMs adjust for 60% LTV from the current 75% and from a consequential decline in yields. Earnings revision can be >30%/>50% for Manappuram for FY13E/FY14E taking RoAs to sub 2%.

LTV capped at 60%, lending against bullion/gold coins restricted

Guidelines have been introduced to protect the financial system against adverse movement in gold prices given increased amount of bank/institutional/retail funds being channelized to these NBFCs. New guidelines are as follows:

·       LTV capped at 60%. Current LTV extended is ~75%.

·       Minimum Tier I of 12% by April 2014. Already recommended under Usha Thorat Committee report in August 2011.

·       Lending against bullion/primary gold and gold coins disallowed. Currently negligible loans are granted against these.

·       Balance sheet disclosure about the percentage of gold loans in total loans.

Lower LTV/AUM + resultant NIM compression to depress RoA

We believe in the near term, as and when loans come for renewal or repayment, disbursements will decline by atleast ~20% as LTVs adjust for 60% vis-à-vis ~75% currently (assuming gold prices stay put). Taking cues from current schemes, lower LTV will call for lower interest rates from the prevalent ~23-25% for 75-80% LTV, resulting in yield decline (by 4-5% points). Also, lower business momentum may lead to deceleration in branch additions (impacting both growth and opex).

Business dynamics to change even as competition from banks rises

The guidelines will force NBFCs to realign their expansion strategies as lower business momentum will hurt operating leverage. This, coupled with increased competition from banks given no cap on their LTVs (assuming they wish to capitalize on the opportunity), will further exacerbate the problem. We believe business will stabilize by FY14 end as branches opened in FY11/FY12 reach optimal capacity and operational leverage benefits start reflecting in RoA. Also, our recent branch visits of Manappuram and Muthoot in southern states suggest that competition from smaller upcoming NBFCs will subside as the strategy followed by these players revolves around offering higher LTV. Within NBFCs, business should now shift to players with increased reach, lower rates and faster turnaround times. In the midst of all this, a positive development is that of ensuring robust asset quality while putting an end to the overhang of regulatory developments.

NBFC-Gold Loan Company - Gold loans lose sheen on LTV cap; sector update

Regards,