Third Quarter Results: NBFCs likely to offset demonetisation impact

Non-banking financial companies (NBFCs) are expected to deliver stable performance for the quarter ended December 31, 2016. 

M B Mahesh, Nischint Chawath and Abhijeet Sakhare of Kotak Institutional Equities said, “Despite challenges in the cash economy, NBFCs will likely deliver stable performance supported by aggressive recovery efforts and regulatory reprieve on NPL classification; a flat qoq loan book will affect NII growth in later quarters.”

The trio added, “A strong October, higher bank balances in November and improving business environment by December-end likely supported this. Small business loans and rural lending had high delinquencies while housing and CVs (likely due to toll holiday, agri transportation and pent-up orders) fared better.”

Loan growth

Kotak expects NBFCs' loan growth to remain flat on a quarter-on-quarter basis as the loan collections were strong in October but went lower than normal in November and December. 

Net interest margin (NIM) is expected to expand for two reason. Firstly, large NBFCs/HFCs will benefit from lower bond yields and secondly, the Reserve Bank of India's (RBI) remission for non-performing loan (NPL) classification to lead lower interest reversals as compared to previous quarters.

On the other hand, led by RBI's 90-day duration for NPL recognition, the NBFCs are expected to make provisions only for (1) standard assets,  (2) extra provisions on existing NPLs, (3) write offs (through security/asset auctions were limited during the quarter) and (4) provisions on securitised loans.

Thus Kotak said, "We do not expect high credit costs despite high delinquencies during the quarter. Overall this Q3, the provisions expenses will stay low."

Kotak's result expectations:

Bajaj Finance: The company is expected to report 31% loan growth translating into 23% earnings growth. 
Kotak said, "The company has consciously gone slow in some segments of retail business. Delinquencies increased in two-wheeler loans (though collections improved in December-end); collections in LAP and consumer loans (all by check) were stable throughout the quarter."

Housing Development Finance Corp (HDFC): Loan growth is seen at 15% in AUMs (asset under management), while NIM to expand due to lowering of bulk borrowing costs. Also, the NPLs for the company are not expected to rise. 

Cholamandalam Investment and Finance Company: Loan growth is expected to moderate to 1% on year-on-year basis. While collections made in vehicle finance segment will likely remain stable and delinquencies in the home equity segment to remain high. 

LIC Housing Finance Companies: Loan growth will moderate to about 13%. Also Higher NIM, lower (standard asset) provisions will boost earnings growth (up 21% yoy).

M&M Financial Services: Q3 earnings will be supported by NPL classification and interest reversals. And loan growth will moderate down to 11% from 14% in 2QFY17.

Muthoot Finance: Gold loan book will decline marginally on qoq basis.Higher delinquencies will lead to higher provisions even as NIM remains almost stable.

Shriram City Union Finance: Loan book expected to be flat this Q3, While collections remain weak, regulatory reprise for NPL classification will support NIM (lower reversals); provisions will be driven by existing NPLs and write offs.

Shriram Transport Finance Company: Loan growth will likely moderate down to 16% yoy. NIM will likely remain stable though loan write-offs will drive provision expenses.