SECTOR UPDATE 15 JAN 2019 NBFCs and HFCs HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters Not all in the same boat NBFCs have grown significantly ahead of Indian aggregate credit over the last decade (19% CAGR vs. overall credit growth of 14%). This growth can be attributed to both intrinsic and extrinsic factors. Intrinsic factors include their ability to (1) Deliver credit to customers that banks cannot reach, (2) Develop niche credit segments and sticky customer relationships, and (3) Price risk appropriately and manage the lending cycle efficiently. On the extrinsic front, growth drivers included (1) Receding competition from PSU banks, (2) Easy access to funds from multiple sources, which has been under question lately, (3) A benign liquidity environment, and (4) Sustained growth in rural demand. While the recent liquidity squeeze in the wholesale debt market (albeit easing now) and asset quality issues have hit some players, the impact is skewed. We believe that long term drivers for quality players remain intact. Recent regulatory support (OMOs, securitisation push) and macro tailwinds (lower G-Sec yields and inflation trajectory) will bring some relief for the sector. However, in the near term, growth, margins and asset quality (for certain players) will come under pressure. NBFCs with strong parentage, granular books, diversified borrowing mix, pricing power and better asset quality may actually emerge stronger in this shakeout. We prefer MMFS (TP Rs 500, 2.75x Dec-20E ABV of Rs 175 + Rs 18 for MBIL) and CIFC (TP Rs 1,616, 3.25x Dec-20E ABV of Rs 497) among asset financiers. In the HFC pack, LICHF (TP Rs 534, 1.5xDec-20E ABV of Rs 356) offers value, despite its low pricing power. Not all in the same boat: A deconstructed view of the NBFC sector offers the best perspective to understand it. The sheer diversity in the NBFC universe implies that not all players are equally affected by forces that are construed to affect the sector as a whole such as the recent drying up of short term liquidity. In the current situation, NBFCs with a granular loan book, strong franchise (pricing power) and good parentage have better access to funds. And may well emerge stronger. Rise in CoF is imminent: Given the liquidity issues, a freeze in funding markets and overall rise in interest rates, an increase in CoF for all NBFCs is inevitable. However, the quantum has varied across companies depending on their liability mix, its nature (fixed or floating) and maturity. Pricing power varies: Margins will depend on the ability to sustainably pass on the rise in CoF to borrowers. This is a function of size, credit segments, competitive intensity and franchise. Growth, NIMs (and thus valuation) will compress: As challenges surrounding funding and margins persist in varying degrees, growth and profitability will be impacted in the near future. This, along with the uncertainty on regulatory changes, makes us believe that peak multiples are unlikely to be revisited even as we retain confidence on the prospects for high quality players in the sector. CMP TP Reco MMFS 438 500 BUY SHTF 1,169 1,520 BUY CIFC 1,190 1,616 BUY LICHF 478 534 BUY Repco 420 585 BUY Darpin Shah [email protected]+91-22-6171-7328
Transcript
SECTOR UPDATE 15 JAN 2019
NBFCs and HFCs
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Not all in the same boat NBFCs have grown significantly ahead of Indian aggregate credit over the last decade (19% CAGR vs. overall credit growth of 14%). This growth can be attributed to both intrinsic and extrinsic factors. Intrinsic factors include their ability to (1) Deliver credit to customers that banks cannot reach, (2) Develop niche credit segments and sticky customer relationships, and (3) Price risk appropriately and manage the lending cycle efficiently. On the extrinsic front, growth drivers included (1) Receding competition from PSU banks, (2) Easy access to funds from multiple sources, which has been under question lately, (3) A benign liquidity environment, and (4) Sustained growth in rural demand. While the recent liquidity squeeze in the wholesale debt market (albeit easing now) and asset quality issues have hit some players, the impact is skewed. We believe that long term drivers for quality players remain intact. Recent regulatory support (OMOs, securitisation push) and macro tailwinds (lower G-Sec yields and inflation trajectory) will bring some relief for the sector. However, in the near term, growth, margins and asset quality (for certain players) will come under pressure. NBFCs with strong parentage, granular books, diversified borrowing mix, pricing power and better asset quality may actually emerge stronger in this shakeout. We prefer MMFS (TP Rs 500, 2.75x Dec-20E ABV of Rs 175 + Rs 18 for MBIL)
and CIFC (TP Rs 1,616, 3.25x Dec-20E ABV of Rs 497) among asset financiers. In the HFC pack, LICHF (TP Rs 534, 1.5xDec-20E ABV of Rs 356) offers value, despite its low pricing power. Not all in the same boat: A deconstructed view of the
NBFC sector offers the best perspective to understand it. The sheer diversity in the NBFC universe implies that not all players are equally affected by forces that are construed to affect the sector as a whole such as the recent drying up of short term liquidity. In the current situation, NBFCs with a granular loan book, strong franchise (pricing power) and good parentage have better access to funds. And may well emerge stronger.
Rise in CoF is imminent: Given the liquidity issues, a freeze in funding markets and overall rise in interest rates, an increase in CoF for all NBFCs is inevitable. However, the quantum has varied across companies depending on their liability mix, its nature (fixed or floating) and maturity.
Pricing power varies: Margins will depend on the ability to sustainably pass on the rise in CoF to borrowers. This is a function of size, credit segments, competitive intensity and franchise.
Growth, NIMs (and thus valuation) will compress: As challenges surrounding funding and margins persist in varying degrees, growth and profitability will be impacted in the near future. This, along with the uncertainty on regulatory changes, makes us believe that peak multiples are unlikely to be revisited even as we retain confidence on the prospects for high quality players in the sector.
Contents NBFCs: The journey so far ................................................................................................................................ 3 What suddenly changed ................................................................................................................................... 3 Borrowing metamorphosed over FY14-19 ......................................................................................................... 5
Bank Credit to NBFCs ......................................................................................................................................... 5 Mutual Fund Lending to NBFCs/ HFCs ............................................................................................................... 7 Funds available, not for all ................................................................................................................................. 9 Rise in CoF is imminent ....................................................................................................................................... 9 Company Wise Borrowing and Maturity Profiles ............................................................................................. 10 CP market data ................................................................................................................................................. 16 Not all have pricing power ................................................................................................................................ 17 Asset quality ..................................................................................................................................................... 17 Action by the Regulators ................................................................................................................................. 19
The Road Ahead ............................................................................................................................................. 20 Peerset Comparison ....................................................................................................................................... 22 Companies
NBFCs : The journey so far... Non-banking finance Cos (NBFCs) provide an
alternative to bank financing for the under-served parts of the real economy, a vital role. NBFCs (incl. HFCs) have filled a void in the lending environment due to their unique skillset that span indentifying, accessing, appropriately pricing and servicing sectors that banks have not been able to cater to.
Between FY08 and FY18, total system credit grew from ~Rs 30 trn to ~Rs 113trn at ~14% CAGR. The share of NBFCs in total credit grew from 12% in FY08 to ~18% in FY18 at ~19% CAGR. The superior growth of NBFCs is a result of availability of ample funding, incredible customer reach and benign competition.
Of total Non bank credit, ~50% is towards housing, 37% towards retail while wholesale exposure is 13%. NBFCs (incl. HFCs) account for ~43% of total Housing Loans.
The size and number of NBFCs has grown significantly. At present, there are 10,064 NBFCs registered with the RBI. As at Oct-18, 6 NBFC/HFCs had grown AUMs beyond the Rs 1trn mark, while 13 NBFC/HFCs had AUMs in excess of Rs 500bn.
Unlike banks (who directly tap savers), NBFC/HFC credit growth has been fuelled largely by borrowings from banks, capital and money markets. Between FY14 and FY18, the share of CPs within the borrowing mix doubled from NBFCs while it trippled for HFCs. Bank credit to NBFCs grew at ~21% CAGR between FY08 to FY18. Over FY14-18, it slowed to ~14% CAGR.
In recent times, however, some NBFCs have faced challenges in mobilising funds on account of money market turmoil and the fear of systemic risk post the IL&FS default. This has resulted in investors questioning the growth prospects and profitability of NBFCs.
What suddenly changed Timeline of Events IL&FS Defaults: IL&FS is one of India’s largest
infrastructure development and finance companies. Touted as a shining example of public private partnership, the group ran aground. In Jun-18, its subsidiary ITNL deferred the payment of ICDs to SIDBI (Source: IL&FS Timeline: When and what happened so far – The Mint). On 28th August, the group’s Financial Services arm delayed payment on its CPs. In early Sept-18, the group defaulted on payment of a ~Rs 10bn Term Loan to SIDBI. This was followed by a round of reactive rating downgrades and even more defaults. IL&FS is registered as a ‘Core Investment Company’, a category of NBFCs.
DHFL Bond Mania: On 21st September, DSP Mutual Fund sold DHFL’s NCDs at a steep discount. While the fund cited portfolio duration reduction and movement in interest rates as the reason for the sale (Source: DHFL paper sale by DSP triggered panic – ET), increase in the perceived credit risk resulted in DHFL’s share price plummeting. These events collectively altered the perception of NBFCs. This was in spite of the company releasing a statement that it had sufficient liquidity (Source: DHFL Press Release dated 24th September, 2018). Almost overnight, all NBFCs were put in the same bucket.
Deputy Governor Viral Acharya’s remarks on the CP Market: At the press conference for the Oct-18 Monetary Policy, the RBI Dy. Governor remarked that NBFCs, particularly HFCs should refrain from funding long term assets using short term debt. These remarks were viewed as a harbinger for regulatory changes.
Total credit grew from ~Rs 30trn in FY08 to ~Rs 113trn in FY18 The share of NBFCs in total credit grew from ~12% in FY08 to ~18% in FY18 CPs constitute ~16% of NBFCs’ borrowings and ~12% of HFCs’ borrowings Bank credit to NBFCs grew at ~21% CAGR between FY08 to FY18 Post the IL&FS episode, raising funds has become an exacting task for certain NBFCs
Total Credit Mix in FY08 : ~Rs 30trn Total Credit Mix in FY18 : ~Rs 113trn
Source: HDFC sec Inst Research Source: HDFC sec Inst Research Mix of NBFCs registered with the RBI : 10,064
Source: HDFC sec Inst Research
PSU Banks60%NBFCs
12%
Private Banks18%
Others10%
PSU Banks47%
NBFCs18%
Private Banks24%
Others11%
Non Deposit
Accepting (Others)
96%
Non Deposit
Accepting Sytemically Important
3%
Deposit Accepting
NBFCs1%
Between FY08 and FY18: -The share of PSU Banks in total credit declined from 60% to 47% as they ran into asset quality and consequently capital adequacy issues -The share of private banks increased from ~18% of total credit to ~24%, thereby growing at ~18% CAGR
NBFCs and HFCs: SECTOR UPDATE
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Borrowing metamorphosed over FY14-19 An analysis of NBFC/HFCs’ borrowing reveals a clear
change in the borrowing mix over FY14-1HFY19. The share of borrowings from banks and FIs has declined for both NBFCs and HFCs consistently, while that of NCDs has remained largely constant over the years. The share of CPs in the borrowing mix has increased considerably for both NBFCs and HFCs.
With ample liquidity and benign interest rates, the share of CPs within NBFCs’ borrowings has increased from 7% to 15% over FY14-18. Over the same period, the share of CPs within HFCs’ borrowings has increased from 4% to 11%.
Due to relatively lower costs, the sharp rise in share of CP borrowings had a positive effect on the CoF and margins for NBFCs/HFCs. However, it increased vulnerability to ALM mismatches (read liquidity shocks!). If the NBFC/HFC is unable to rollover or refinance CPs, solvency issues arise and growth is adversely impacted. Over reliance on CPs as a source of funds makes NBFCs (esp. HFCs) having loan books with longer maturities increases the solvency risk.
Liability Mix : NBFCs
Source: HDFC sec Inst Research
Liability Mix : HFCs
Source: HDFC sec Inst Research
Bank Credit to NBFCs : accelerated ahead of system Bank credit to NBFCs has risen at ~20% CAGR between
over FY08-18 vs. non-food credit at ~13% CAGR.
The share of NBFCs in total bank credit grew from ~3.6% in FY08 to ~7% by Oct-18 (peak). Since FY17, the share of bank credit saw a shrarp uptick (150bps) led by additional liquidity (post demonetisation), asset quality issues faced in other sectors (power and infrastructure) and sluggish corporate lending by large banks. More recently (between Mar-17 and Nov-18), total non food credit grew by ~14% while bank credit to NBFCs grew by a whopping 45%.
In recent times, bank credit to NBFCs dipped ~9% from Mar-18 levels in Apr-18. However credit to NBFCs has significantly since then, ~20% between Jul-18 and Nov-18. As at Nov-18, total Non Food Credit was ~Rs 81trn while bank credit to NBFCs was ~Rs 5.6trn (~57% YoY growth).
Between FY14 and FY18, the reliance of NBFCs on bank borrowings declined. The share of banks and FIs in NBFCs’ borrowing mix fell from ~51% in FY14 to ~37% in FY18 and increased marginally to ~38% in 1HFY19 The share of CPs in NBFCs’ borrowing mix doubled between FY14 and FY18 to ~15% and that of HFCs tripled to ~11% Between FY14-18, bank credit to NBFC grew at ~20% CAGR vs. Non-Food Credit growth at ~13% CAGR The share of NBFCs in Non-Food Credit jumped from ~6.5% as at Mar-18 to ~7% as at Nov-18
37 36 41 38
7 1115 16
51 45 37 38
5 8 7 8
FY14 FY16 FY18 1HFY19
NCD/Sub Debt CP Banks & FI Others
45 45 49 45
4 8 11 1230 25 20 23
17 18 16 16
4 4 4 4
FY14 FY16 FY18 1HFY19
NCD/Sub Debt CP Banks & FI Deposits Others
%
%
NBFCs and HFCs: SECTOR UPDATE
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Bank Credit to NBFCs Non Food Credit and Bank Credit to NBFCs (∆YoY)
Source: RBI and HDFC sec Inst Research Source: RBI and HDFC sec Inst Research YoY Growth in Bank Credit to Various Sectors Share of Various Sectors in Non Food Credit
Source: RBI and HDFC sec Inst Research Source: RBI and HDFC sec Inst Research
The share of NBFCs in Non-Food Credit reached an all time high of ~7% in Oct-18 (~Rs 5.6trn) Bank credit to NBFCs grew ~57% YoY in Nov-18 Even as bank credit to various sectors such as infrastructure, textiles, metals and power slowed down post FY12, bank credit to NBFCs continued to grow. There was a sharp uptick in bank credit to NBFCs post Mar-17 and particularly between Mar-18 and Nov-18
Mutual Fund Lending to NBFCs/HFCs Similar to Bank credit to NBFCs, the share of NBFC debt
in the total funds deployed by mutual funds (MFs) grew at a faster rate than the overall funds deployed. While total funds (debt) deployed by MFs grew ~3x, the exposure of mutual funds to NBFC debt grew ~3.8x between Jan-12 and Nov-18. As at Nov-18, total AUM of debt MFs was ~Rs 14trn, of which lending to NBFCs was ~Rs 2.4trn (~17% of funds deployed).
MF lending to NBFCs grew at ~33% CAGR between Mar-14 and Mar-18 while bank credit to NBFCs grew at ~13% during the period. This growth was driven by CPs, which expanded at ~37% CAGR over FY14-18.
While NBFC debt as a percentage of AUM has moved in a cyclical fashion between Jan-12 to Jun-16, it rose almost constantly from Jun-16 and peaked in Jul-18 at ~19%. Further, total funds deployed in the NBFC sector doubled between Jun-16 and Jul-18.
The faster than average growth of debt fund exposure to NBFCs indicates the growth in the appetite of debt funds for NBFC paper.
Post the IL&FS shock (by Nov-18), MF exposure to NBFC debt fell by ~10% from the Jul-18 peaks. Exposure to NBFC commercial paper fell by ~19%.
Of the total NBFC exposure of MFs in Nov-18, CPs comprise for ~53% while Corporate Debt (floating rate bonds, NCDs and sub debt) account for ~47%. In Jul-18, the mix of CPs and Corp Debt was 59% and 41%.
From the above, it is evident that not only have MFs contributed significantly to the growth of NBFCs but NBFC debt presented an attractive investment opportunity for MFs, thus creating a symbiotic relationship. Increasing investment in longer tenure Corporate Debt is also visible post Jul-18.
However, while NBFC exposure may look attractive to MFs, it may not be a stable source of funding for the issuing NBFCs, especially short term CPs (tenure up to 12 months).
In the event of redemption pressure, MFs may choose not to subscribe to debt issued by NBFCs. As a result, redemption pressure faced by MFs is transmitted to NBFCs. NBFCs that are overly dependent on this source of funds may thus face liquidity issues. The situation may be further exacerbated by the absence of alternative sources of funds.
NBFCs constituted ~17% (~Rs 2.4trn) of total funds deployed by Debt MFs as at Nov-18 The share of NBFCs in total funds deployed by Debt MFs peaked at ~19% in Jul-18 Debt MFs’ exposure to NBFCs fell by ~10% between Jul-18 (peak levels) and Nov-18; of this exposure to CPs issued by NBFCs fell by ~19% from peak levels in Jul-18 53% of total NBFC Debt owned by MFs was towards CPs while the remaining was towards Corp Debt (NCDs, Sub-Debt etc.)
NBFCs and HFCs: SECTOR UPDATE
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Debt MF Lending to NBFCs Composition of Debt MF Lending to NBFCs
Source: SEBI and HDFC sec Inst Research Source: SEBI and HDFC sec Inst Research Debt MFs and Debt MF Lending to NBFCs (∆YoY)
Source: SEBI and HDFC sec Inst Research
The share of NBFC debt in total funds deployed by Debt MFs peaked in Jul-18 at ~19% post which it fell ~200bps to ~17% as at Nov-18 Between Jul-18 and Nov-18, Debt MF exposure to NBFCs fell by ~10% to ~Rs 2.4trn
Funds available, not for all NBFC growth over the past decade was fuelled by an
almost unending influx of capital (both debt and equity) from myriad sources. This was owing to their perceived (and valid) capability to grow ahead of the system and tap lending opportunities to under-served segments and geographies. Money flowed in from banks, debt markets and public/private equity investors. Towards end-FY17, demonetisation provided a boost to systemic liquidity, incremental funds that flowed into bank deposits and mutual funds were readily on-lent to NBFCs amongst other industries.
The IL&FS default and DHFL bond sale in mid-FY19 materially altered sector perception. CP markets witnessed turmoil (lower rollovers dip in CP and a spike in interest rates). NBFCs that had relied excessively on CPs were squeezed for liquidity, especially those where asset quality and ALM looked relatively challenged. The change in perceived risk translated into difficulty in raising funds for certain players in Sept & Oct-18.
We believe that funding constraints will not impact all NBFCs equally. Our interactions with banks and MFs suggest that NBFCs with strong fundamentals such as good parentage and management quality, better asset quality and granular, asset-backed lending will not face challenges in raising funds, they will have a disproportionate advantage in securing funding. While liquidity has improved since the beginning of Nov-18, well positioned NBFCs will continue to have an advantage in raising funds.
Rise in CoF is imminent The squeeze in liquidity and change in perceived risk
has led to a rise in the incremental cost of funds from Oct-18 on account of higher risk premiums. We believe that cost of funds will continue to rise as the full impact of the rise is absorbed by the liability book of NBFCs. The quantum and time taken will depend upon the borrower’s pedigree, book mix (fixed and floating) as well as the duration of the liabilities. Therefore NBFCs that have easier access to funds will also be able to borrow at a lower rate. This is also evidenced by widening CP market spreads. (Refer Pg 17)
Between Mar-18 and Sept-18, 10 yr G-Sec yields rose ~80bps to 8.2% and the RBI increased the benchmark Repo Rate by ~50bps to 6.75%. These factors contributed to a rise in the CoF in addition to other factors. However, 10 yr G-Sec yields are back to ~7.4%; further, the RBI has cut its inflation projections for FY19. These developments will soften the blow but need to be monitored.
CoF Movement for NBFCs
Source: HDFC sec Inst Research
NBFC growth rode the rising tide of systemic liquidity with funds from multiple sources (Banks, Debt Capital Markets, PE Funds etc.) While the IL&FS default and DHFL bond sale did not have a direct bearing on the sector, it resulted in a change in the perception of NBFCs We believe that not all NBFCs will be impacted by this change; therefore certain players will have a greater advantage in raising funds The impacts of G-sec yield movement and inflation projections on the CoF of NBFCs are key monitorables
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
FY14
FY15
FY16
FY17
FY18
FY20
E
NBFCs and HFCs: SECTOR UPDATE
Page | 10
Co Wise Borrowing Breakup: 2QFY19 Co Wise Borrowing Profile: 2QFY19
Source: Co and HDFC sec Inst Research; *CPs not disclosed separately (included in NCDs)
Source: Co and HDFC sec Inst Research Source: Co and HDFC sec Inst Research Gap: Surplus/ shortfall as a % of total assets
For certain players, CPs constitute a significant part of their borrowing profile: -MGFL (26%) -ABCL (19%) -MUTH (12%) -Indostar(11%) Subject to the tenure of their assets, these companies may face challenges in accessing funds unless they switch to alternative sources of borrowings The extent and speed of rise in CoF will be higher for NBFCs/HFCs having a greater proportion of floating rate borrowings. The following have significant floating rate borrowings: -Repco (85%) -MGMA (63%) -MGFL (57%) -SCUF (55%) HFCs such as DHFL, IBFL and CANF interestingly have surpluses in the ‘Up to 1 month’ bucket
Source: Co and HDFC sec Inst Research Source: Co and HDFC sec Inst Research NBFC Maturity Profile : 2-3 months (Mar-18) HFC Maturity Profile : 2-3 months (Mar-18)
Source: Co and HDFC sec Inst Research Source: Co and HDFC sec Inst Research
NBFCs have smaller mismatches across buckets as compared to HFCs Our interactions with the mgt of various NBFCs and HFCs suggest that HFCs disclose their ALM profile based on behavioral maturities rather than contractual maturities. The difference between the two is the prepayment assumption, which may not hold good in times of a liquidity crunch Gold financiers such as MUTH and MGFL have significant surpluses in short term buckets Corporate lenders such as Indostar have significant shortfalls in near term buckets
Source: Co and HDFC sec Inst Research Source: Co and HDFC sec Inst Research NBFC Maturity Profile: 6-12 months (Mar-18) HFC Maturity Profile: 6-12 months (Mar-18)
Source: Co and HDFC sec Inst Research Source: Co and HDFC sec Inst Research
Most NBFCs have surpluses in the buckets up to 1 year
-10%
-5%
0%
5%
10%
15%
20%
25%
0%
5%
10%
15%
20%
25%
30%
INDO
STAR
MG
FL
SHTF
Hin
duja
MG
MA
CIFC
MM
FS
BAFL
SUF
SCU
F
MAS
MU
TH
Liabilities Assets Gap (RHS)
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%
Repc
o
DHFL
CANF
LICH
F
IBHF
L
PNBH
F
Liabilities Assets Gap (RHS)
-20%
-15%
-10%
-5%
0%
5%
10%
0%
20%
40%
60%
80%
100%
MAS
MU
TH
MG
FL
SUF
Hin
duja
MG
MA
CIFC
SCU
F
INDO
STAR
SHTF
BAFL
MM
FS
Liabilities Assets Gap (RHS)
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
0.0%2.0%4.0%6.0%8.0%
10.0%12.0%14.0%16.0%18.0%
CANF
LICH
F
DHFL
Repc
o
IBHF
L
PNBH
F
Liabilities Assets Gap (RHS)
NBFCs and HFCs: SECTOR UPDATE
Page | 13
NBFC Maturity Profile: 1-3 years (Mar-18) HFC Maturity Profile: 1-3 years (Mar-18)
1.
Source: Co and HDFC sec Inst Research Source: Co and HDFC sec Inst Research NBFC Maturity Profile: 3-5 years (Mar-18) HFC Maturity Profile: 3-5 years (Mar-18)
Source: Co and HDFC sec Inst Research Source: Co and HDFC sec Inst Research
HFCs have the largest shortfalls in the 1-3 year buckets across the board
-15%-10%-5%0%5%10%15%20%25%30%35%
0%
10%
20%
30%
40%
50%
60%
BAFL
MU
TH
Hin
duja
SCU
F
MG
FL
CIFC
MM
FS
MG
MA
SHTF
INDO
STAR
SUF
MAS
Liabilities Assets GAP (RHS)
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
0%
10%
20%
30%
40%
50%
LICH
F
DHFL
PNBH
F
Repc
o
CAN
F
IBH
FL
Liabilities Assets Gap (RHS)
-4%
-2%
0%
2%
4%
6%
8%
0%
5%
10%
15%
20%
25%
MU
TH
SCU
F
Hin
duja
MG
FL
MG
MA
MAS
BAFL
CIFC
MM
FS
SUF
SHTF
INDO
STAR
Liabilities Assets Gap (RHS)
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
0%
5%
10%
15%
20%
25%
30%
CAN
F
DHFL
LICH
F
IBH
FL
PNBH
F
Repc
o
Liabilities Assets Gap (RHS)
NBFCs and HFCs: SECTOR UPDATE
Page | 14
NBFC Maturity Profile: Beyond 5 years (Mar-18) HFC Maturity Profile: 5-7 years (From Mar-18)
Source: Co and HDFC sec Inst Research Source: Co and HDFC sec Inst Research NBFCs : Duration of Assets & Liabilities (Mar-18) HFC Maturity Profile: 7-10 years (From Mar-18)
Source: Co and HDFC sec Inst Research Source: Co and HDFC sec Inst Research
Most HFCs have shortfalls in the buckets up to the 5-7 year bucket, after which they have surpluses. Most NBFCs do not have significant differences in the average durations of their assets and liabilities
-10%
-5%
0%
5%
10%
15%
20%
25%
0%
5%
10%
15%
20%
25%
MM
FS
SUF
SHTF
MU
TH
MG
FL
MG
MA
MAS
SCU
F
Hin
duja
BAFL
CIFC
INDO
STAR
Liabilities Assets Gap (RHS)
-4%
-2%
0%
2%
4%
6%
8%
0.0%
5.0%
10.0%
15.0%
20.0%
DHFL
CAN
F
IBH
FL
LICH
F
PNBH
F
Repc
o
Liabilities Assets Gap (RHS)
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
INDO
STAR
CIFC
MAS
Hin
duja
MG
MA
SHTF
BAFL
SUF
SCU
F
MG
FL
MM
FS
MU
TH
Liabilities Assets Gap (RHS)Yrs Yrs
0%
5%
10%
15%
20%
0%
5%
10%
15%
20%
25%
IBH
FL
DHFL
PNBH
F
LICH
F
CAN
F
Repc
o
Liabilities Assets Gap (RHS)
NBFCs and HFCs: SECTOR UPDATE
Page | 15
HFC Maturity Profile: Beyond 10 years (Mar-18) HFCs- Duration of Assets & Liabilities (Mar-18)
Source: Co and HDFC sec Inst Research Source: Co and HDFC sec Inst Research
Most HFCs have significant differences between the average duration of assets and liabilities 10 Yr G-Sec Yields rose ~80bps from 7.4% in Mar-18 to ~8.2% in Sept-18; since then yields have fallen back to Mar-18 levels. This fall may provide some relief to NBFCs on the CoFs front The quantum of CPs outstanding reached an all time high of ~Rs 6.4trn on Sept-18 with fresh issues peaking in Jul-18 at ~Rs 1.7trn
0%
5%
10%
15%
20%
25%
30%
35%
40%
0%
10%
20%
30%
40%
50%
IBH
FL
PNBH
F
Repc
o
CAN
F
LICH
F
DHFL
Liabilities Assets Gap (RHS)
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0
1
2
3
4
5
6
7
LICH
F
Repc
o
CAN
F
DHFL
PNBH
F
IBH
FL
Assets Liabilities Gap (RHS)
Yrs
NBFCs and HFCs: SECTOR UPDATE
Page | 16
10 Year G-Sec and AAA Bond Yields CP Market Volumes
Source: Bloomberg and HDFC sec Inst Research Source: RBI and HDFC sec Inst Research CP Market and Repo Rates Co Wise Capital Adequacy Ratio: 2QFY19
Source: RBI and HDFC sec Inst Research Source: Co and HDFC sec Inst Research
The upper end of the CP market rates have fluctuated drastically towards the end of CY 18 While the higher end of CP markets remained volatile, the lower end rose marginally, indicating that high pedigree borrowers were able to raise money at comfortable rates Correlation analysis of CP rates with Repo Rates yielded the following interesting results: -High and Low CP rates have a low positive correlation -Low CP Rates have a high positive correlation with the Repo Rate Post the IL&FS CP default, volatility at the higher end of the CP markets increased dramatically while the lower end rose gradually; this trend indicates that high pedigree borrowers were able to access funds at marginally higher rates while other borrowers faced difficulty in raising funds
6%
7%
8%
9%
10%
Dec-
17
Jan-
18
Feb-
18
Mar
-18
Apr-
18
May
-…
Jun-
18
Jul-1
8
Aug-
18
Sep-
18
Oct
-18
Nov
-18
Dec-
18
10 Year G-Sec Yield 10 Year AAA Bond Yield
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Dec-
11
Jun-
12
Dec-
12
Jun-
13
Dec-
13
Jun-
14
Dec-
14
Jun-
15
Dec-
15
Jun-
16
Dec-
16
Jun-
17
Dec-
17
Jun-
18
Dec-
18
Total Outstanding Reported during the Fortnight
Rs bn
0%2%4%6%8%
10%12%14%16%18%20%
Dec-
11
Jun-
12
Dec-
12
Jun-
13
Dec-
13
Jun-
14
Dec-
14
Jun-
15
Dec-
15
Jun-
16
Dec-
16
Jun-
17
Dec-
17
Jun-
18
Dec-
18
Low (CP) High (CP) Repo Rate
0%
5%
10%
15%
20%
25%
30%
35%
PNBH
FLI
CHF
SUF
DHFL
SHTF
Hin
duja
ABCL
CIFC
CAN
FM
MFS
SCU
FM
GM
ABA
FLIB
HFL
Repc
oM
UTH
MG
FLM
ASIN
DOST
AR
CRAR
NBFCs and HFCs: SECTOR UPDATE
Page | 17
Not all have pricing power
While a rise in CoF is virtually certain for all NBFCs, their spreads depend on their ability to pass on the increase in costs to borrowers. We believe that not all NBFCs are equally equipped in this regard. Their pricing power is a function of their size, competitive intensity and franchise (in decreasing order of co-efficient). Accordingly, asset financiers such as MMFS, CIFC and SHTF are well poised to pass on the rise in CoF to their borrowers. However, the pass through will occur only in the case of fresh loans, therefore book mix (fixed and floating) and tenure will play an important role. Similarly financiers of real estate developers are also capable of passing on the rise in CoF to their borrowers. HFC and LAP lenders will be in a spot due to their limited ability to pass on the increase in CoF. Such lenders run the risk of higher balance transfers if they significantly increase their rates. Interestingly, a large chunk of HFCs’ books consist of floating rate loans.
Ability to Pass on CoFs
Source: HDFC sec Inst Research
Asset Quality
Tightening liquidity and rising CoF will impact asset quality. The quantum of the impact will differ drastically depending upon the portfolio mix of the individual NBFC/HFC. We expect gold backed and asset financiers, particularly vehicle financiers such as CIFC and MMFS to get away virtually scot free. Large ticket LAP and real estate lenders will be impacted the most. These segments are reliant on refinance by NBFCs, therefore, as NBFCs slowdown on disbursals, the ability of these borrowers to repay loans will be compromised. Interestingly, NBFC MFIs face a unique situation where disbursals and collections are positively correlated. Rural borrowers may be unwilling to repay loans if news of disbursal slowdown spreads.
Asset Quality : 2QFY19
Source: Company, HDFC sec Inst Research
Rise in CoF is virtually certain for all NBFCs/HFCs The ability to pass on the rise in CoF will impact margins from here on which will depend upon their size, competitive intensity and franchise We believe the highest ability to pass on higher rates resides with: -Gold Loans -Unsecured Loans -Vehicle Finance (old) Infrastructure Finance, Home Loan and LAP lenders will face the greatest difficulty in passing on the increase in the cost of funds
0%
2%
4%
6%
8%
10%
PNBH
FCA
NF
MG
FLIB
HFL
MU
THIn
dost
…AB
CLD
HFL
LICH
FM
ASBA
FLSU
FCI
FCRe
pco
Hin
duja
SCU
FSH
TFM
MFS
MG
MA
GNPA NNPA
Low•Infrastructure
Finance (Operational)
•LAP
Medium•Infrastructure
FInance (Others)
•Home Loans•Vehicle
Finance (New)
High•Gold Loans•Unsecured
Lending•Vehicle Finance
(Old)
NBFCs and HFCs: SECTOR UPDATE
Page | 18
HFCs’ Book Mix: 2QFY19 Asset Quality Risk
Source: Company and HDFC sec Inst Research Source: HDFC sec Inst Research
16.0 18.34.9
22.0 16.0 20.06.2
0.1
17.0 20.0
0%
20%
40%
60%
80%
100%
LICH
F
Repc
o
CAN
F
DHFL
PNBH
F
IBH
FL
LAP Developer Finance HL Others
Low•Gold
Loans
Medium•Infrastructure
Finance•Unsecured
Lending•Vehicle
FInance
High•Real Estate
Finance•Home Loans•LAP
NBFCs and HFCs: SECTOR UPDATE
Page | 19
Actions by Regulators
Post the IL&FS debacle; it became particularly difficult for NBFCs and HFCs to raise money from the CP market. Further, funding from other sources (Banks) also began to slowdown. In order to avoid a systemic
liquidity crunch, the RBI (and NHB) undertook various measures to enable NBFCs to raise funds from other sources (Banks). The following is a summary of actions initiated by the regulator:
Date Action
Sep-18 to Dec-18
The quantum and frequency of OMO Purchase auctions by the RBI increased dramatically post August 2018. Between Sep-18 and Jan-19, the RBI will have infused systemic liquidity to the tune of ~Rs 2.06trn. The quantum of credit available to NBFCs/HFCs is contingent upon the willingness of banks to lend to them.
8 Oct-18 The NHB increased refinance limits to HFCs from Rs 240bn to Rs 300bn
19 Oct-18 The RBI notified that banks will be able to ‘reckon’ government securities held by them equal to the amount of incremental outstanding credit to NBFCs and HFCs as level 1 High Quality Liquid Assets under the LCR framework. This benefit was limited to 0.5% of NDTL.
19 Oct-18 The RBI revised the single borrower exposure limit to NBFCs (that are not engaged in infrastructure finance) from 10% to 15% of capital funds.
29 Nov-18 The RBI reduced the minimum holding period (for loans with an original maturity of more than 5 years) as an eligibility criterion for loans to be securitised/ directly assigned by NBFCs/HFCs to banks.
OMO Auction Volume Data
Source: RBI and HDFC sec Inst Research
-300-200-100
0100200300400500600
Jan-
16
Feb-
16
Mar
-16
Apr-
16
May
-16
Jun-
16
Aug-
16
Sep-
16
Oct
-16
Jul-1
7
Aug-
17
Sep-
17
Oct
-17
Nov-
17
May
-18
Jun-
18
Jul -1
8
Aug-
18
Sep-
18
Oct
-18
Nov-
18
Dec-
18
Jan-
19
Rs bn
The volume of OMO purchase auctions rose sharply from Sept-18 with a cumulative auction volume at ~Rs 2.06trn between Sept-18 and Jan-19. The monthly volume of OMO purchase auctions reached their highest levels since Mar-16 We believe that the RBI has carefully selected measures to ensure that liquidity is made available to NBFCs/HFCs only through banks which would enable it to indirectly exercise greater control over them; further the RBI did not announce any direct measures for these lenders The RBI has hinted at similar volumes of OMO transactions continuing till Mar-19
NBFCs and HFCs: SECTOR UPDATE
Page | 20
The Road Ahead... Our meetings with several senior personnel in banks and NBFCs have led to the following conclusions.
Funding Squeeze and Credit Crunch: NBFC credit grew at 19% CAGR from FY-08 to FY-18 against systemic credit growth of 14% during the corresponding period. The share of NBFCs in total credit increased from 12% in FY08 to 18% in FY18. Over reliance on debt capital markets, especially short term CP markets (CPs ~16% of total NBFC borrowings), resulted in a liquidity squeeze post Aug-18. Post the CP market turmoil, banks supposedly slowed down lending to NBFCs (RBI data suggests otherwise!). Still, it is likely that aggregate NBFC credit growth will decelerate. We foresee polarisation/divergence in the space, driven by pedigree and quality.
Fuelling growth and liquidity: In the light of current events, some ingenuity on the liabilities side is called for. Securitisation/direct assignment will be back in vogue as a source of incremental funding. Private sector banks should be keen on acquiring NBFC loans, especially corporate heavy banks (in order to meet PSL requirements). It is worth noting that securitisation is a more attractive option for NBFCs as compared to direct assignment, from a book size and asset quality perspective (optically).
Vulnerability of Certain Asset Classes: Across the spectrum of NBFCs’ customers, certain classes are more vulnerable to a funding slowdown than others. Structured & real estate finance, LAP and infrastructure finance are the most susceptible to liquidity shocks. Consequently, NBFCs having large exposures to these sectors will face asset quality issues in the future. Asset and home loan financiers and will emerge relatively unscathed while infrastructure financiers and LAP lenders will bare most of the brunt. Average ticket size
is also an important determinant of overall asset quality in such a scenario, given the inverse relationship between the two. NBFCs having small ticket size exposures will not be affected as much as those having bulky exposures.
NIM Compression: Given the slowdown in funding, a rise in CoF in the near term is imminent. Similar to availability of funding, the pedigree and vintage of the NBFCs will also affect the rise in the marginal CoF. In times of liquidity shortages, the spread/range of near term interest rates increases. This is visible in the upper end of CP market interest rates. This vindicates our belief that strong players are able to access short term funds at marginally higher interest rates while others are facing the brunt of substantially higher interest rates coupled with shortage of funds. Further, NBFCs may create liquidity buffers to shield themselves from future liquidity events. This in turn will be detrimental for margins, especially if regulatory reforms require them to do so.
Regulatory Reforms: The effect of the IL&FS default on the NBFC sector is in many ways a repeat of the CRB case of FY97. Funding became scarce, interest rates went up and growth slowed down, a Minsky Moment* of sorts. We expect that the regulator will not allow complacency to kill the cat this time. Regulatory reforms pertaining to asset-liability and liquidity management may be in store for the sector. These measures may be as mild as ALM guidelines or as strict as mandatory maintenance of liquid assets and/or caps on short term borrowings for NBFCs/HFCs. These reforms may be preceded by a regulatory review. The severity of regulatory reforms will affect the permanence of compression in NIMs but will contribute to the sector’s stability and resilience in the long term. Short term NIM compression is inevitable.
Business Model Evolution: The unique structure and business model of NBFCs have been responsible for their rapid growth. We believe their ability to identify, access and lend to under-served segments, particularly in the hinterland (not the forte of banks) is their USP. Further, their ability to price risk and follow up on collections also contributed to their growth. We believe that players will need to develop innovative fund raising strategies. Short term borrowings will be substituted by bank loans and securitisation. NBFCs may become a medium for banks to access the hinterland. The RBI guidelines on co-origination of loans by banks and NBFCs are a step in this direction.
Myriad Businesses, One Sector: A deconstructed view of the sector offers the best perspective to understand it. The sheer diversity of the lending done by NBFCs should imply that not all players are equally affected by forces that are construed to affect the sector as a whole. In the current situation, lenders with a granular book and strong franchise (that translate into pricing power) and good parentage (that influences access to funds) will emerge stronger.
* Minsky Moment: It refers to a period of time when a market/ industry/company fails or falls into crisis after an extended bullish period, risky decisions and unsustainable growth. The term was coined by the late economist Hyman Minsky who believed that complacency was the root cause of financial instability.
NBFCs and HFCs: SECTOR UPDATE
Page | 22
Change in Estimates CIFC
Rs mn FY19E FY20E FY21E
Old New Change Old New Change Old New Change NII 27,903 27,454 -1.6% 32,271 31,786 -1.5% 38,486.9 37,397 -2.8% PPOP 22,073 21,593 -2.2% 25,754 25,176 -2.2% 31,267.7 30,021 -4.0% PAT 11,989 11,688 -2.5% 14,579 14,226 -2.4% 17,550.2 16,784 -4.4% Adj. BVPS (Rs) 354 353 -0.2% 433 432 -0.2% 522.4 519.0 -0.6% SHTF
Rs mn FY19E FY20E FY21E
Old New Change Old New Change Old New Change NII 76,079 75,601 -0.6% 86,407 84,769 -1.9% 99,452 97,246 -2.2% PPOP 60,614 60,241 -0.6% 68,464 67,187 -1.9% 78,011 76,297 -2.2% PAT 23,493 23,268 -1.0% 28,179 27,414 -2.7% 32,811 31,824 -3.0% Adj. BVPS (Rs) 580 565 -2.6% 691 671 -2.9% 802 789 -1.6% Repco
Rs mn FY19E FY20E FY21E
Old New Change Old New Change Old New Change NII 4,631 4,624 -0.1% 5,141 5,062 -1.5% 5852 5,740 -1.9% PPOP 4,095 4,089 -0.1% 4,517 4,442 -1.7% 5134 5,036 -1.9% PAT 2,417 2,414 -0.1% 2,688 2,647 -1.5% 3072 3,024 -1.6% Adj. BVPS (Rs) 223 223 0.0% 260 261 0.5% 302 303 0.3% Source: HDFC sec Inst Research
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Hurdle yes, trouble no! MMFS continues to be our preferred bet amongst asset financiers given its (1) Strong parentage, (2) Demonstrated delivery of growth and (3) Improving asset quality, as a result of focus on collections. While CPs formed ~14% of the total borrowings (as on Sept-18), we believe MMFS is better placed to tide over the liquidity squeeze given its strong parentage. We maintain BUY with an SOTP of Rs 500 (2.75x Dec-20E ABV of Rs175 and Rs 18 for MIBL)
Growth momentum to sustain: In the context of slow auto sales by OEMs and a tight liquidity environment in 3QFY19, we expect healthy growth to continue. This was corroborated by our ground check (Refer to our report titled Better than expected dated 21-Dec-18). We expect MMFS to demonstrate superior growth and have factored in an AUM CAGR of ~20% over FY18-21E.
NIM compression is imminent: MMFS’ focus on upcountry markets will better enable it to pass on the rise in CoF. The ALM position as at Sep-18 indicates that MMFS was relatively immune to liquidity shocks (+ve ALM in shorter tenure buckets). NIM compression is imminent as the rise in the CoF (~75bps) exceeds the increase in lending rates (~50bps), on fresh loans. We have factored in NIMs of 8.49% over FY19-20E.
Asset quality not a challenge: Asset quality improved post its rigorous collection drive (corroborated by our ground check), gross stage III at ~9% (down ~600 bps in 5 quarters) as at Sep-18. We believe MMFS’ asset quality will only improve hereon.
Asset Quality: Set To Improve
Source: Co and HDFC sec Inst Research
Financial Summary YE Mar (Rs mn) FY17 FY18 FY19E FY20E FY21E
Net NPLs (Rs mn) 15,997 19,706 15,800 15,005 18,131
Gross NPLs (%) Total Assets 9.00 8.50 8.00 7.50 7.50
Net NPLs (%)Total Assets 3.60 3.80 2.55 2.01 2.04
Coverage Ratio (%) 61.8 58.1 68.1 73.1 72.8
Provision/Avg. Loans (%) 3.0 2.4 2.0 1.8 1.7
RoAA Tree Net Interest Income 6.81% 7.34% 8.12% 8.11% 8.10%
Non-Interest Income 1.09% 1.04% 0.84% 0.80% 0.76%
Operating Cost 3.39% 3.33% 3.31% 3.27% 3.22%
Provisions 3.06% 2.44% 2.04% 1.90% 1.81%
Tax 0.51% 0.96% 1.23% 1.27% 1.30%
ROAA 0.94% 1.65% 2.39% 2.46% 2.53%
Leverage (x) 6.8 6.4 6.1 6.5 6.9
ROAE 6.4% 10.5% 14.5% 16.0% 17.4% Source: Co and HDFC sec Inst Research
COMPANY UPDATE 15 JAN 2019
Shriram Transport Finance BUY
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Driving on SHTF’s widespread presence (~1,300 branches) and unparalleled acumen in the used CV business gives it a competitive edge. While growth may slowdown in the near term, robust new CV sales over the past couple of years augur well for the long term prospects of its used CV business. NIM compression is expected, in spite of a lower proportion of CPs (~8%). We have lowered our earnings estimates by ~3% over FY19-21E to factor in additional NIM compression and slightly lower AUM growth. The possibility of the three-way merger remains an overhang on the stock. Maintain BUY with a TP of Rs 1,520 (2x Dec-20E ABV of Rs 760) Growth slowdown: Contrary to the management's
guidance of sustained AUM growth (~21% in FY18), we expect AUM growth to moderate in the near term owing to liquidity issues and industry headwinds. We have factored an AUM growth of ~16% for FY19E and ~15% over FY19-20E. Strong CV sales over the last couple of years bode well for SHTF’s used CV business.
NIMs to compress: In spite of being one of the best placed to pass on the rise in CoF, NIM compression is inevitable as the increase in lending rates will lag the rise in the CoF. Meanwhile, SHTF has diversified its borrowing profile by raising funds from various sources (ECBs, retail deposits and NCDs). We have factored in NIMs of 7.2% over FY 19-21E.
Asset quality not a challenge: SHTF makes up for its ‘relatively weak’ asset quality with laudable coverage (~70%). We do not foresee any asset quality challenges for SHTF in spite of a rise in fuel prices and interest rates.
Merger an overhang: The proposed three-way merger between SHTF, SCUF and their holding co will remain an overhang for the stock.
Net NPLs (Rs mn) 16,590 21,311 16,376 14,450 13,211
Gross NPLs (%) 8.20 9.15 8.60 8.30 8.10
Net NPLs (%) 2.70 2.38 1.78 1.36 1.08
Coverage Ratio (%) 69.3 71.1 79.3 83.6 86.6
Provision/Avg. Loans (%) 3.7 4.1 2.8 2.4 2.3
RoAA Tree Net Interest Income 7.65% 8.12% 8.02% 7.77% 7.50%
Non-interest Income 0.28% 0.53% 0.27% 0.27% 0.26%
Operating Cost 1.79% 1.90% 1.90% 1.88% 1.88%
Provisions 3.43% 3.83% 2.61% 2.31% 2.13%
Tax 0.94% 0.99% 1.31% 1.33% 1.30%
ROAA 1.77% 1.93% 2.47% 2.51% 2.46%
Leverage (x) 6.64 6.82 6.98 7.02 7.22
ROAE 11.72% 13.14% 17.22% 17.62% 17.73% Source: Co and HDFC sec Inst Research
COMPANY UPDATE 15 JAN 2019
Cholamandalam Investment & Finance BUY
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Best of the lotCIFC’s diversified portfolio, comprising of VF (vehicle finance) and HE (home equity, LAP) gives it a unique position in the NBFC space. While growth in VF disbursals is likely to slow down, we expect HE disbursals to grow steadily, as it comes off a cyclically sluggish phase. Increase in lending rates and positive mismatches in shorter buckets will reduce NIM compression. We expect CIFC to deliver best-in-class return ratios (RoAA 2.77%, RoAE of 20.6%) over FY19-21E even after factoring in marginally lower growth (~19% vs. 20%+ earlier). Maintain BUY with a TP of Rs 1,616 (3.25x Dec-20E ABV of Rs 497).
Healthy AUM growth: After displaying strong growth (30% CAGR) in VF disbursals between FY16-FY18, slowdown in auto sales and a tight liquidity environment will result in a slower growth of VF disbursals. Reducing competition and increasing presence in the LAP business will compensate partly for slowing VF disbursals. We have factored in AUM growth of 19% with VF AUM growth at 19% CAGR and HE growth CAGR at ~12% over FY19-21E.
Margins to compress: In spite of rate hikes and rating upgrades in 1HFY19, NIMs are expected to compress. This is because of the large proportion of the fixed rate book (VF 74%). However, surplus liquidity in short term buckets may provide some relief. We have factored in NIMs of 5.7% over FY19-21E
Asset quality best in peerset: CIFC’s asset quality is impressive when compared to its peers (VF GNPAs ~2%). We do not foresee a material change in asset quality in the current environment due to higher fuel
prices or interest rates. We have factored in LLP of 63bps over FY19-21E.
Net NPLs (Rs mn) 10,334.3 6,541.1 6,522.7 6,603.2 7,778.0
Gross NPLs (%) 4.66 2.94 2.77 2.67 2.77
Net NPLs (%) 3.02 1.53 1.26 1.08 1.09
Coverage Ratio (%) 35.1 48.1 54.5 59.5 60.6
Provision/Avg. Loans (%) 0.91 0.80 0.72 0.57 0.62
RoAA Tree Net Interest Income 6.73% 7.03% 6.28% 6.11% 6.17%
Non-interest Income 1.56% 1.85% 1.42% 1.40% 1.41%
Operating Cost 3.46% 3.67% 2.76% 2.67% 2.63%
Provisions 1.06% 0.98% 0.86% 0.66% 0.73%
Tax 1.32% 1.45% 1.41% 1.44% 1.46%
ROAA 2.45% 2.77% 2.67% 2.73% 2.77%
Leverage (x) 7.35 7.42 7.72 7.65 7.42
ROAE 18.04% 20.59% 20.64% 20.92% 20.57% Source: Co and HDFC sec Inst Research
COMPANY UPDATE 15 JAN 2019
LIC Housing Finance BUY
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Dark horse The recent liquidity issues may turn out to be a blessing in disguise for large HFCs, esp. LICHF given its strong parentage. We believe that smaller HFCs will have to reduce disbursals, given the cautious stance adopted by banks and debt markets. Further, increase in the MCLR by banks will increase LICHF’s pricing power. Consequently, we expect LICHF to emerge stronger from these times. Asset quality and spreads are the key monitorables. Maintain BUY with a TP of Rs 534 (1.5x Dec-20E ABV of Rs 356)
Steady Growth: After years of tepid performance in the individual HF space, we believe LICHF will be able to turn things around. With no major concerns over liquidity, better pricing power and reduced competition and balance transfers, we believe LICHF may be able to grow faster. We have factored in 15% AUM CAGR over FY18-21E.
NIM stable; key monitorable: Given the tight liquidity environment, CoF will rise; however, the increase will be comparatively lower for LICHF given its parentage. Further, increase in the MCLR by large banks in FY19 will give LICHF greater pricing power. We have factored in spreads of 1.37% and NIM of 2.45% over FY19-21E.
Asset quality: LICHF disappointed on the asset quality front in 1H with a steep rise in individual (1.3%) as well projects NPAs (8.9%). Further deterioration of the lumpy project book is the key risk to our earnings estimates.
RoAA Tree Net Interest Income 2.67% 2.38% 2.42% 2.38% 2.36%
Non Interest Income 0.07% 0.07% 0.05% 0.05% 0.05%
Operating Cost 0.44% 0.40% 0.22% 0.24% 0.24%
Provisions 0.20% 0.15% 0.29% 0.29% 0.29%
Tax 0.73% 0.66% 0.67% 0.65% 0.64%
ROAA 1.37% 1.23% 1.30% 1.26% 1.24%
Leverage (x) 13.9 13.6 13.5 13.5 13.6
ROAE 19.1% 16.7% 17.5% 16.9% 16.9% Source: Co and HDFC sec Inst Research
COMPANY UPDATE 15 JAN 2019
Repco Home Finance BUY
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Muted performance After the recent liquidity squeeze, while competition eases, we believe growth at Repco will continue at current levels dragged by the performance of its TN book. Further, we believe margins will compress due to A-L mismatches in shorter tenure buckets and its large floating rate borrowings, unutilised bank lines may provide some respite. We have a BUY rating with a TP of Rs 585 (2.0xDec-20 ABV of Rs293)
Current growth to continue: Given the current challenges faced by Repco on its home turf, combined with the tight liquidity conditions in 3Q, we expect Repco’s growth to remain uninspiring (~15%), despite easing competition. We believe the management’s growth guidance for 2HFY19 is a tad optimistic. We have factored AUM growth of 15% over FY19-21E.
NIM compression imminent: Large asset-liability mismatches in shorter-term buckets along with a larger portion of floating rate borrowings (~85%) make Repco especially vulnerable to liquidity squeezes. The re-pricing of loans from Oct-18 will provide some relief (+50bps). We have factored NIMs of ~4.30% over FY19-21E.
Asset quality: The progress of repossession and resolutions of property under SARFAESI will determine the asset quality from here on. The stock of repossessed assets was ~Rs 500mn as at Sept-18 (~13% of GNPAs). We have factored in GNPAs of ~2.2% by FY21E.
Loan Growth: To Remain Moderate
Source: Co and HDFC sec Inst Research
Financial Summary YE Mar (Rs mn) FY17 FY18 FY19E FY20E FY21E
Net Interest Income 3,678 4,286 4,624 5,062 5,740
PPOP 3,320 3,813 4,089 4,442 5,036
PAT 1,823 2,060 2,414 2,647 3,024
EPS (Rs) 29.1 32.9 38.6 42.3 48.3
ROAE (%) 2.17 2.17 2.27 2.19 2.18
ROAA (%) 17.4 16.7 16.8 15.8 15.7
Adj. BVPS (Rs) 162 192 223 261 303
P/ABV (x) 2.59 2.19 1.88 1.61 1.39
P/E (x) 14.4 12.8 10.9 9.9 8.7 Source: Co and HDFC sec Inst Research
INDUSTRY NBFCs CMP (as on 14 Jan 2019) Rs 423 Target Price Rs 585 Nifty 10,738
Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
Disclosure: I, Darpin Shah, MBA, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. 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