NBFCs: Fall in cost of funds likely to help margins

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Margins can also benefit from a reduction in overall leverage ratios.

NBFCs have seen significant volatility in CY20 on the borrowings front, from a sharp increase in CoF in Q2 to multi-year lows by the end of CY20. Given the abundant liquidity in the system and RBI’s accommodative stance, incremental CoF across sources is likely to remain benign. NBFCs with a niche presence and strong pricing power are likely to witness margin expansion. Reduction in excess liquidity on the balance sheet and benefit of capital raise for a few players would also aid margins.

NBFCs with healthy parentage and strong credit ratings have seen their CoF from market borrowings (NCDs and CPs) decline by ~200bp in the last six months. At the same time, cost of bank borrowings/public deposits has declined by ~80bp/130bp. HDFC, LICHF, BAF and LTFH stand out in the NBFC pack, with over 40% of borrowings accruing from NCDs and CPs. Given their shorter borrowing profile, Vehicle Financiers are likely to benefit from savings on refinancing as 40-62% of their market borrowings are maturing in the next six quarters (H1FY20-FY22).

Another trigger would be the reduction in liquidity on the balance sheet. With gradual redeployment of money from liquid assets to loans, margins should benefit meaningfully. For Housing Financiers, every 100bp of liquidity redeployed into loans would boost margins by 3-4bp, while that for Vehicle Financiers would be 10-12bp. Hence, a reduction in liquidity to pre-COVID levels could benefit NBFC margins by 10-40bp in FY22e.

Margins can also benefit from a reduction in overall leverage ratios. HDFC/MMFS/SHTF raised Rs 150/31/15 bn in FY21. Based on growth-RoE matrix and dividend payout ratio, leverage is likely to remain stable in the near term. We expect NIM to be largely stable for HFCs as competition would compel them to pass on the CoF benefit to their customers. Vehicle Financiers, with a niche customer segment and some pricing power, may not pass on the full benefit to their customers.

Players like CIFC and MMFS are likely to witness 70-160bp improvement in NIMs over FY20-23e. We increase our FY22e EPS estimates by low-to-mid single digits on average, with the highest upgrade of 9% for LICHF.

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