Housing finance majors likely to outperform in December quarter

Among others, vehicle financiers are expected to post sequential growth

The non-banking financial companies (NBFCs) sector is strongly linked to consumption, and expectations for the third quarter of financial year 2021-22 (Q3FY22) appear to be fairly optimistic. Despite the beginning of a third wave, disbursement momentum was strong.

There will be significant differences in growth rates across segments. In sequential terms, vehicle finance and housing mortgages, especially in the affordable segment, would have done well, given better Q3 sales. Collection efficiency has likely improved. New slippages should have declined.

But microfinance institutions (MFIs) are still weak, and credit costs for MFI lenders would remain high, given elevated write-offs. Wholesale lenders also remain cautious, especially in real estate disbursements. Loans to real estate developers, which were already recognised as stressed, could become non-performing assets (NPAs) in Q3.

On the interest rate side, further improvements in cost of funding are not likely. The persistent inflation may force a normalisation in the Reserve Bank of India’s (RBI’s) monetary policy, with the central bank unlikely to continue to hold policy rates at the current level, unless inflation reduces. But the NBFCs with stronger balance sheets have been able to refinance old higher-cost debt, which should have led to some decline in cost of funding.

There is an ongoing debate about how to report asset quality (gross NPA or gross stage 3) in accounting terms and it’s likely that reported asset quality will deteriorate QoQ for most lenders, given the new RBI guidelines on NPAs. Credit cost is difficult to predict and may rise due to this, but the market has discounted this factor and it is likely to be already reflected in prices.

In the housing sector, retail disbursements seemed to be strong. Property registrations saw recovery through Q3. Higher affordability and low interest rates remain key drivers. Demand is muted in the SME and corporate segments, however, and mortgages remain a highly competitive market with strong competition from banks. Corporate and developer demand for real estate related credit could lag for another quarter or two, but this segment has probably bottomed out so there is a possible upside. Affordable housing financiers are likely to deliver strong year-on-year (YoY) growth.

Growth is likely to be slow but steady in the vehicle finance market. The auto industry is still running under capacity due to supply chain issues, especially chip shortages. Sales are still appreciably below pre-Covid levels. But the festive season did provide a bump to volumes and FY23 is expected to have stronger volumes on the back of demand recovery. 

The gold loan segment may see relatively less action, and auctioning is likely to remain high. Gold prices increased 3 per cent QoQ in September-December, which means the loan to value ratios may have declined in Q3. August-September 2020 saw peak gold prices and some of those loans may be coming up for renewal or auctions at lower prices. 

The Nifty Financial Services index, which includes banks, NBFCs, insurers, and project finance companies, has returned 20.7 per cent in the last 12 months and 4.2 per cent in the last month. That’s an underperformance compared to the Nifty, which has 26 per cent and 6 per cent returns in the periods. We might expect housing finance majors to outperform, while MFI-focussed NBFCs will remain under pressure.