 "Profit to come under pressure for NBFCs")
With stocks of banks
out of favour for some time now, investor preference has shifted to non-banking financial companies (NBFCs). However, while Q3 FY16 results reported so far indicates that expanding net interest income (NII, or revenue) may not be a near-term challenge thanks to buoyant retail interest, experts say a closer look at the results suggests tougher times are imminent for NBFCs.
out of favour for some time now, investor preference has shifted to non-banking financial companies (NBFCs). However, while Q3 FY16 results reported so far indicates that expanding net interest income (NII, or revenue) may not be a near-term challenge thanks to buoyant retail interest, experts say a closer look at the results suggests tougher times are imminent for NBFCs.
Take the case of M&M Financial Services. The impact of credit slowdown was steep for the company as its net interest income (NII) declined by 1% year-on-year due to higher interest reversal and moderation in lending yields on account of change in loan mix. Assets under management (AUM) growth in Q3'FY16 was guided by higher proportion of relatively low-margin products such as utility vehicles, cars and used vehicles. Provisioning of Rs 341 crore (up 27% year-on-year) on account of higher delinquencies and change in recognition norms for non-performing loans (NPL) took the profit for Q3-FY16 down by 51% on an annual basis. With the management guiding for cautious loan growth, analysts at Prabhudas Lilladher reduce their profit growth estimates by 30% over FY16 and FY17.
HDFC, India’s largest mortgage firm, saw asset quality remain robust but failed to keep pace with the Street's estimates as profits (Rs 1,520 crore) rose just by 7% year-on-year due to higher provisioning and lower non-core income. Loan book growth in the third quarter at 13% on an annual basis, too, moderated compared to historical levels of 15-20%. Likewise, even in the case of LIC Housing Finance, though profit (Rs 420 crore) grew by 22% year-on-year, the Street is factoring in moderation in loan growth, which fell from 19% year-on-year loan growth two years ago (Q3'FY14) to 15% in the December quarter of FY16. Consequently, JM Financial foresees slower loan book growth of 16% over FY15 and FY18 for LIC Housing Finance.
Dewan Housing Finance also witnessed moderation in growth of AUM in Q3'FY16. This along with higher interest cost curtailed NII growth to 18% year-on-year as against analyst expectation of 25-27%. Analysts at IIFL attribute the slower pace of AUM growth (25% in Q3'FY16 versus 27-28% historically) to repayment rate of 5% cent being higher than the usual 3.3%. They say with no exit barriers in the form of loan prepayment charges, it is easier for borrowers to shift their loans to any other bank or NBFC.
Of the lot, results of Indiabulls Housing Finance and L&T Finance have been more assuring. AUMs expanded by 29% year-on-year on the back of robust mortgage and corporate loan book growth for Indiabulls Housing Finance much in contrast to LIC Housing Finance. Analysts say higher growth for Indiabulls Housing Finance is due to increase in loan ticket size (more Rs 25 lakhs), suggesting that the growth is perhaps on a relatively lower base, given the recent shift in strategy to focus on housing loans. Better disbursal to infrastructure sector (29% growth year-on-year) hedged L&T Finance to counter the moderating 17% growth in retail loan portfolio.
Nitin Kumar of Prabhudas Lilladher sums up that the quarter gone by has not been the best for most NBFCs due to stress on account of NPL recognition. In addition to this, Abhinesh Vijayaraj of Spark Capital feels that as most NBFCs cater to customers with irregular cash flows, challenges on account of NPL recognition may persist, apart from depleting asset quality.