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NBFC slump can be a blessing in disguise for banks: CLSA

CLSA’s house call on NBFCs is not negative yet, though it is not very bullish either.

Nov 19, 2018, 02.11 PM IST
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CLSA’s house call on NBFCs is not negative yet, though it is not very bullish either.
The growth slowdown in the non-banking financial companies (NBFC) space following the liquidity crisis has been a blessing in disguise for banks, as it will help domestic lenders gain some of the space that they had lost to the shadow bankers.

“The banking system has gone through a situation where credit growth was around 5 per cent while NBFCs were running at 25 per cent. Now, the pendulum will swing to the other end, where banks credit will grow 15-16 per cent and that of NBFCs at 10-15 per cent, excluding the large NBFCs in the housing space,” says Aashish Agarwal, Head of India Research at CLSA.

CLSA’s house call on NBFCs is not negative yet, though it is not very bullish either. The global brokerage still prefers NBFCs that have strong domain expertise.

India NBFC stocks have been witnessing a severe selloff since August-end following signs of a liquidity crisis after infrastructure-focussed NBFC IL&FS went belly up. Shares of companies like IL&FS Investment Managers, Dewan Housing Finance Corporation, Reliance Capital and Edelweiss Financial Services have plunged between 40 per cent and 73 per cent since August end.

“NBFCs that have managed to grow and survive multiple cycles are the ones that have built very strong domain expertise in the field, be it housing, tractor or truck financing. However, history shows NBFCs that have tried to do multiple products like cars, as well as home loans, have not really succeeded when times has become tougher. That is why we have maintained our preference for domain-based expertise in NBFCs like housing finance companies,” Agarwal said.

He said many of the NBFCs would see a very sharp rise in funding cost compared with the banks and most them would either shrink balance sheets by selling portfolios or might get out of certain verticals that they have historically operated in.

Agarwal believes housing finance companies, affordable housing and very niche auto and tractor loans will dominate the market. “Apart from these verticals, we have a bleak outlook on the rest,” he said.

Commenting on the banking sector, Agarwal said September quarter turned out to be a mixed one for banks in terms of earnings. Private banks have been coming out of the big non-performing loans provisioning and the challenge will continue over the next 3-4 quarters.

“NBFCs earnings will be very weak over the next 3-4 quarters, because we have not really seen the impact of the liquidity crunch or risk aversion into their funding cost. In the next 3-4 quarters, NBFCs’ earnings will be weighed down by lower growth and higher funding cost. NBFCs that are reporting very strong growth at over 20-25 per cent might even see a couple of quarters of earnings drop on a YoY basis,” he said.

Large companies in the banking and housing financial space look better to him. “Two criteria which I use to make the cut are: Anyone with capital and funding is the one that will see disproportionate growth over the next four quarters. So, anyone with tier 1 of more than 10-11 per cent and any bank which has a CASA ratio of 40 per cent is the kind of entities that may witness strong growth over the next 4 quarters,” he added.

As the banking space is coming out of the NPL cycle, Agarwal sees very high optical growth in 2-3 years from a low base. Credit demand outside the consumption space is another positive. He said housing will soon move from beneficiary of economic growth to driver of economic growth. “I think that’s the main theme we like to believe in. Growth and lower credit cost are the two biggest positives,” he added.

Agarwala said there would be no big defaults or any accounting issue, or any NBFC crisis which could further hit the sentiment for the country. He sees leadership and merger-related uncertainty in public sector banks. “Uncertainty in the PSU banks need to be addressed,” he said. He projects a boom in India over the next five years in terms of employment, credit and construction.
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