The US Federal Reserve is expected to initiate a rate-cut cycle, either in its latest meeting or the following one. Once the Fed begins easing key interest rates, the Reserve Bank is likely to follow suit, aligning its monetary policy accordingly.
Despite delivering healthy growth and maintaining robust asset quality, analysts believe NBFCs have been overlooked by the market for the past three years. However, leading players in the sector have defied this trend with the top 10 comfortably outperforming benchmark indices in the last one year.
Tata Investment Corporation and Edelweiss Financial Services led the gains by surging over 100% in the last one year. Shriram Finance, Muthoot Finance, and Manappuram Finance too have jumped over 50% in this period.Only 3 out of the top 20 NBFC stocks delivered negative returns in the past year or so. These include CreditAccess Grameen, IDFC and IREDA.
Given the current market conditions, analysts said valuations in the NBFC sector appear attractive.
“As interest rates are poised to decrease and consumption demand, particularly in rural areas, is showing signs of recovery, we may see a healthy growth in NBFC assets under management (AUM), especially those focused on consumer finance, two-wheeler loans, and gold-based lending,” said Yashovardhan Khemka, Senior Manager β Research & Analytics at Abans Holdings.
Nomura, however, estimates that the impact of a rate cut cycle on the NBFCs will be uneven, largely due to differences in their asset and liability structures.
With RBI nudging non-bank lenders to diversify apart from bank funding, the cost of funds should remain elevated for, at least, another 1-2 quarters before falling thereafter.
“A positive impact of a policy rate cut, on cost of funds for NBFCs, would be visible with a lag for most of the NBFCs,” Nomura said.
When interest rates go down, fixed rate lenders like NBFCs and small finance banks tend to do better as their borrowing rates go down, resulting in expansion of net interest margins.
“The NIM trends will vary based on the loan book composition of individual NBFCs. Those with a higher proportion of fixed-rate loans may see an increase in NIMs as their cost of funds decreases during. Conversely, NBFCs with a higher proportion of floating-rate loans like housing finance companies may experience some moderation in NIMs,” said Khemka.
Combining the impact on yield and cost of funds, SBI Cards, Mahindra Finance and Shriram Finance appear to be the biggest beneficiaries in terms of a positive impact on NIMs, according to Nomura.
Which stocks to buy?
Within the NBFC space, analysts said housing finance companies will be the biggest immediate beneficiary of the rate cycle.
“Something like an LIC Housing on the PSU side and on the private side Bajaj Housing Finance can be looked at,” said Digant Haria of GreenEdge Wealth.
“Investors may consider investing in stocks of companies with strong asset quality and a higher proportion of fixed-rate loans in their portfolios, such as Bajaj Finance, M&M Financial Services, and Muthoot Finance. While housing finance companies like LIC Housing Finance and Bajaj Housing Finance may also benefit from assets under management (AUM) growth, declining NIMs may limit their potential gains.
Meanwhile, Nomura has a Buy rating on Shriram Finance, Five Star and Aadhar Housing Finance in the NBFC sector.
(With data inputs from Ritesh Presswala)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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