Profits under pressure for some NBFCs

Tough credit environment and tighter NPL recognition norms likely to keep a check on earnings

With stocks of banking institutions out of flavour for quite some time, preference has shifted to non-banking financial companies (NBFCs). However, experts say a closer look at the December 2015 quarter results reported so far indicates tougher days ahead.

Take M&M Financial Services. The credit slowdown impact was steep, with net interest income (NII) down one per cent over a year before, due to higher interest reversal and moderation in lending yields on account of changes in the loan mix. Assets under management (AUM) growth was guided by a higher proportion of relatively low-margin products such as utility vehicles, cars and used vehicles. Provisioning of Rs 341 crore (up 27 per cent) on account of higher delinquencies and change in recognition norms for non-performing loans (NPLs) took the quarter's profit down 51 per cent over a year.

With the management saying it expected cautious loan growth, analysts at Prabhudas Lilladher have reduced their profit growth estimate for the company by 30 per cent over FY16 and FY17.

For India's largest mortgage provider, HDFC, even as asset quality remains robust, the company did not keep pace with the Street's estimates. Profit at Rs 1,520 crore rose only seven per cent year-on-year, due to higher provisioning and lower non-core income. Non-interest income (profit from sale of investment) was Rs 57 crore, down from Rs 113 core in the year-before period. Income from leased properties was only Rs 1 crore, as against Rs 17 crore during this period. The loan book growth was 13 per cent, from the historical 15-20 per cent.

  At LIC Housing Finance, though profit (Rs 420 crore) grew 22 per cent, the Street is factoring a moderation in loan growth. From a little over 19 per cent annual loan growth two years earlier in this quarter , it was 15 per cent in December '15. Consequently, JM Financial foresees a slower annual loan book growth of 16 per cent over FY15 and FY18.

Dewan Housing Finance also saw a moderation in growth of AUM. This and higher interest cost curtailed NII growth to 18 per cent year-on-year, as against analysts' expectation of 25-27 per cent. Analysts at IIFL attribute the slower pace of AUM growth (25 per cent in the quarter versus 27-28 per cent historically) to a repayment rate of five per cent, higher than the usual (3.3 per cent). 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, the results of Indiabulls Housing Finance and L&T Finance have been more reassuring. AUMs expanded 29 per cent, on the back of a robust mortgage and corporate loan book growth. Analysts say this higher growth for Indiabulls is due to a rise in the loan size (more above Rs 25 lakh each), suggesting the growth is perhaps on a relatively lower base, given the recent shift in strategy to a focus on housing loans. Better disbursal to the infrastructure sector (29 per cent growth over a year) hedged L&T Finance to counter the moderating 17 per cent growth in its small loan portfolio.

The most recent results came from Bajaj Finance, which also clocked a good show. Net profit rose 58 per cent, much ahead of expectation and among the highest in six quarters. The growth in AUM at a little over 40 per cent, with its focus on retail (small) loans, is enviable in the weak environment and so is the bad loans share at only 1.3 per cent of loan book.

Nitin Kumar of Prabhudas Lilladher says the quarter for most NBFCs saw stress on account of NPL recognition. In addition, Abhinesh Vijayaraj of Spark Capital feels as most NBFCs cater to customers with irregular cash flows, challenges on account of NPL recognition might persist, apart from depleting asset quality.