Analysts of IIFL Capital Services expect growth moderation for lenders in FY25, after RWA increase and rising delinquencies in the pockets of unsecured loans (STPL, CC, MFI). However, large, diversified NBFCs under analysts of IIFL Capital Services coverage are set to deliver 20-25% AUM Cagr, led by product and distribution expansion. These growth rates will still be 5-10% points higher than their historical average, and 1.5x-2x of the banking system credit growth of ~13-14% in FY25. NIMs are unlikely to materially expand even for fixed rate lenders in FY25 (~10bps for CIFC/SHFL), as COF will remain elevated even after accounting for 50bps rate cut in H2FY25. For banks and mortgage lenders, NIMs may come under pressure with interest rate cuts in FY25. For NBFCs, credit cost is likely to inch up by 20-40bps over FY25-26 from FY23 levels; reflecting changing book mix and rising stress in unsecured loans. Expect large, diversified NBFCs to deliver 10-30% earnings growth vs 0-20% for banks in FY25 (except HDFACB). Given the growth and asset quality headwinds for select smaller NBFCs, analysts of IIFL Capital Services retain their preference for BAF (top pick) and CIFC that are trading at reasonable valuations, adjusted for growth and profitability.
Growth to moderate but large, diversified NBFCs to grow at 1.5-2x of the banking system
Analysts of IIFL Capital Services expect growth for NBFCs to moderate in FY25, after RWA increase and rising delinquencies in the unsecured segments (STPL, credit cards, MFI, etc.). Unsecured consumer loans contributed 3%-50% of incremental retail credit growth for large, diversified NBFCs under analysts of IIFL Capital Services coverage in H1FY24 vs 45% for the NBFC sector. Analysts of IIFL Capital Services expect a relatively lower AUM growth moderation of 300-600bps to 20-25% Cagr for NBFCs under coverage, given their growth led by product and distribution expansion. These growth rates will still be 5-10% points higher than their historical average and 1.5x-2x of the banking system credit growth of ~13-14% in FY25.
Need to hold the horses on margin tailwinds from lower COF
COF tailwinds from rate cuts in FY25 are unlikely to be material, because COF is set to rise 10-25bps further in H2FY24 (bond repricing at 70- 170bps higher rates, RWA increased linked ~25-30bps increase in bank borrowing cost and MCLR repricing); and is unlikely to decline much in FY25, even after building in 50bps of rate cuts in Sep’24. This is because: 1) Bond repricing would still happen at 75-170bps higher rates (except for LTFH and SHFL). 2) Cost of MCLR-linked bank borrowings likely to further increase in H1FY25. Consequently, analysts of IIFL Capital Services expect marginal NIM expansion of ~5-10bps in FY25 for even fixed rate lending NBFCs under their coverage, given the divergent COF and yield trajectories (competition, yields on new businesses, asset mix change). Forecast flatto-30bps NIM compression for MMFS/ Fusion/ BAF, ~10bps expansion for CIFC/SHFL and 120bps expansion for LTFH (100% retail). This would be in contrast to 5-20bps of NIM compression for large Pvt/PSU banks (except HDFCB).
Credit costs to increase by 20-40bps with rising delinquencies in STPL, credit cards and MFI
While the AQ stress in small-ticket PL (STPL) is well known, analysts of IIFL Capital Services are seeing the signs of rising delinquencies in other unsecured loans such as credit cards and MFI. Credit card delinquencies have increased 10-100bps QoQ in Q2FY24 (RBL, SBI cards). Whereas the MFI state level delinquencies have inched up by 10-90 bps QoQ in MP/RJ/PB/UK/HR (14.6% of industry AUM) in Q1FY24. NBFCs under their coverage have minimal exposure to STPL, but MFI constitutes 28% of AUM for LTFH. Analysts of IIFL Capital Services expect credit costs to increase by 20-40bps over FY24-26 from FY23 levels for NBFCs under their coverage, reflecting changing book mix and rising stress in unsecured loans.
Large NBFCs at attractive valuations for superior earnings growth profile
Notwithstanding the growth moderation in FY25, analysts of IIFL Capital Services expect large NBFCs under their coverage to deliver earnings growth of 10-30% in FY25 vs 0- 20% for large Pvt and PSU banks (except HDFC). This is even as these NBFCs are trading near their LTA multiples. Analysts of IIFL Capital Services have revised their estimates (4-5% earnings cut) and TPs for NBFCs: BAF (Rs9,300), CIFC (Rs1,450), SHFL (Rs2,450), LTFH (Rs170), MMFS (Rs240) and Fusion (750). Their preferred picks BAF and CIFC may appear expensive on an absolute basis, but are reasonably valued adjusted for superior profitability and growth (0.7x-1.1x PEG).
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