Shares of NBFCs to come under pressure: Macquarie

MUMBAI: Shares of NBFCs will come under pressure in coming days due to tough macroeconomic conditions, slow loan growth, rise in provisioning and shrinking margins, Macquarie Equities Research said. The broking firm has initiated a bearish stance on the sector.

The broking firm has "underperform" rating on LIC Housing Finance (LICHF) and Mahindra & Mahindra Financial Services (MMFS) and "neutral" on Shriram Transport Finance (SHTF). Valuations in the sector are nearly 15% above historical averages for MMFS and SHTF and 54% above average for LICHF and these stocks could derate further, Macquarie said in a report.

All the three stocks have underperformed the benchmark index Sensex over the past one month. While LICHF lost 0.12%, MMFS fell 7% and SHTF declined 15%.
In the same period, Sensex gained 1.4%.The firm expects net interest margins of these NBFCs to shrink by 25-30 bps from a year ago due to rise in cost of funds. In addition to tough competition, LICHF could also be hit by higher regulator-driven general provisions.

The firm has a target price of Rs 190 on the stock. Higher base, slower demand and higher interest rates will lower auto sales growth to average 15% year-on-year in FY11-13 from 28% in FY09-11, thus taking a toll on auto financing.

The broking firm sees average assets under management (AUM) of SHTF, which is focused on commercial vehicle financing, to slow down to 13% YoY for FY11-13 against 24% in FY09-11. For MMFS, focused on auto lending, average AUM growth would slow to 20% YoY from 33%, the broking firm said. Credit costs are expected to increase to 170 bps in FY13 from 150 bps in FY11 for SHTF and MMFS. Changes on regulatory front will also have an adverse impact on these companies, the brokerage said.

For instance, loans by banks for the purpose of on-lending to NBFCs, other than micro finance institutions, have been taken out of the priority sector category for banks. This type of funding came at nearly 100 bps discount to normal funding for NBFCs. The minimum capital adequacy ratio for deposittaking NBFCs has also been increased to 15% from March 31, 2012 from 12%.

"Banks are likely to be much more cautious about buying loans from NBFCs which should lower securitisation volumes for SHTF and MMFS," the report said. "We believe regulatory norms for NBFCs could be made tighter, possibly by this July and expect tighter supervision and consequently lower volumes of loan sales by SHTF and MMFS to banks," it said.