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On course to recovery

Growth has slowed across NBFCs, withseveral contracting their loan books. However, after a tough 12-15 months, theNBFC space is now ripe for a turnaround as a lot of pieces have fallen intoplace, writes

 

 

The 2nd Quarter of FY2019-20witnessed loan growth dropping down to demonetisation lows of 6.0 per cent, asthe NBFC lending pull-back (disbursements -36 per cent Y-o-Y) was coupled withthe slowdown in bank lending (8.0 per cent Y-o-Y). Growth for NBFCs and HFCshas also slowed down to 7.0 per cent from 22 per cent a year ago. With privatebank growth also slowing, overall growth (banks + NBFCs and HFCs) has fallen to6.0 per cent Y-o-Y from >10 per cent in 4Q19 and 11 per cent in 2Q19.

Bank growth slowing has been driven by bothprivate and PSU banks, with PSU bank growth back down to 5.0 per cent Y-o-Yfrom 8.0 per cent Y-o-Y in Q1, and private bank growth down to 14 per cent Y-o-Yfrom 22 per cent a year ago. NBFC + HFC growth continued to moderate, down to 7.0per cent Y-o-Y vs 24 per cent a year ago, with NBFC growth slowing to 10 percent Y-o-Y and HFCs growing 2.0 per cent Y-o-Y. Disbursements have contracted32 per cent Y-o-Y during the 1st quarter FY2019-20.

And, though it has been a tough 12-15months, industry analysts believe that the NBFC space is now ripe for aturnaround as a lot of pieces fall in place including:

a) stronger liability profile supported bymore diversified, granular and longer duration bank borrowings, deposits andsecuritisation,

b) significantly improved ALM profiles,

c) lower cost of borrowing andnormalization of credit spreads,

d) significant improvement in overallsystem liquidity (from deficit of `1.7-trn in Dec’18 tosurplus of `2.2-trn currently),

e) resilient business models as manyplayers move out of ‘also ran’ businesses to focus on corecompetencies/granular/retail portfolios,

f) steady asset quality trends despite achallenging environment, and

g) recent equity raise from players likePiramal, Edelweiss, etc., which will aid in a return of confidence to thesector.

Moreover, external support in the form of:

  • GOI initiatives, like realestate AIF,

  • RBI’s measures, such as highersingle-borrower exposure limit for NBFCs, PSL status to on-lending to NBFCs,etc., and

  • big ticket resolutions, such asEssar Steel and the admission of Dewan Housing into NCLT under the amended IBCrules for Financial Service Providers (FSPs) could further improve fund flow tothe sector as banks get access to blocked capital and regain confidence in thesector.

    During 1HFY20, incremental borrowing mix ofcertain NBFCs/HFCs was dominated by bank borrowings (accounting for c.40 percent) and deposits. Moreover, securitization emerged as a key fund raising toolwith the volume of securitisations for the industry jumping 48 per cent Y-o-Yto `1.0-trillion in 1HFY20.

    The last quarter saw an improvement inmargins for both PSU as well as private banks, with a sharper improvement atPSUs on the back of lower slippages and declining cost of funds. As LDRsimprove, we expect NIMs to improve further. However, with RBI focus ontransmission, we may see pace of lending rate cuts increase, and the impact offloating rate retail loans shifting to externally benchmarked rate could have someimpact in the near term.

    Coming to ALM profiles, players havewitnessed an improvement in the up to 1yr bucket mismatch – with HFCs, HDFCcontinues to maintain best-in-class ALM with a positive mismatch of 5.0 percent of borrowings as of FY19 while LICHF/PNBHF are running a negativemismatch. However, comfort can be drawn from strong promoter backing for LICHFand PNBHF.

    Within, vehicle financiers, MMFS/SHTFmaintain positive mismatch in the up to-1yr bucket at 18 per cent/5.0 per centrespectively. In addition to increasing share of longer term liabilities,improving ALMs, the sector is also bracing for the upcoming LCR regime (to kickin from Dec’20) with average C&CE on balance sheet going up from 5.6 percent in FY17 to 7.3 per cent as of FY19 as many NBFCs have started holding atleast 2-3 months of liquidity, compared to one month before the IL&FScrisis.

    All these transitions have resulted in anNBFC/HFC sector which is much stronger and resilient owing to

    a) improved ALMs,

    b) diversified and longer term borrowingmix with focus on retail and bank lines, and

    c) focus on balance sheet liquidity underthe new LCR framework.

     

    Growthto be led by retail lines

    Asset mix has seen shift towardsretail/granular lines are lenders remain averse to taking on new lumpyexposures on the corporate/wholesale side. AUM mix for HFCs has moved in favourof retail housing – share up 100bps YoY to 68 per cent of loans in Sep’19.

    In the backdrop of weak OEM sales, vehiclefinanciers have banked on deep distribution and used/old vehicles category tomaintain growth and spreads as funding costs became dearer.

     

    Consolidationin wholesale and real estate financiers to lead to higher profitability

    In the aftermath of the IL&FS liquiditycrisis, the corporate lending landscape – and especially real-estate sectorlending – has undergone significant changes. While two large HFCs – IndiabullsHousing (4.0 per cent developer finance market share as of FY19) and DewanHousing (10 per cent) – are reeling from company specific issues, erstwhileactive players like Piramal (7.0 per cent), Edelweiss (6.0 per cent) too havestarted to pivot to retail lines with plans to de-grow/defocus from developerfinancing. Banks, such as Yes Bank (7.0 per cent) have also moved to a retailgrowth strategy.

    The real estate market is expected to see asignificant decline in competitive intensity as 35 per cent of the market areunder some form of stress given liquidity, funding and concentration issues.All these bode well for the largest and strongest players.

     

    Fundingfor NBFCs remains constrained

    Over past year, MFs have cut NBFC exposureby 30 per cent. NBFCs have tided over this largely through increased sell-downsand higher bank funding (+30 per cent Y-o-Y). NBFC exposure for most PSU banksis now 10-15 per cent of their loan book.

    Debt markets continue to differentiate andlong-term funding is still available to only a select few. For short-termpaper, the spread on borrowing costs among NBFCs have widened to historic highsof 400 bp+. Recently, with divergent trends visible even for sell-downs fromNBFCs, the funding options for the perceived stressed names have reducedfurther.

    Longer-term funding for NBFCs remainstight, with several NBFCs unable to raise long-term money as differentiationcontinues. October saw a sharp reduction in bond issuances, down 40 per cent Y-o-Yand ex-HDFC and LIC was down 95 per cent Y-o-Y.

    Access to shorter-term money has also beenlimited for some NBFCs. IIFL, JM Fin, and Edelweiss have raised short-term CPs(<10 days) at 8.5-9.5 per cent yield. Recent 60-90-day CP issuances by ABCap and MMFS have been at 5.5-6.5 per cent yield, and HDFC and LIC Housing haveraised one-year CPs at 6.5 per cent yield.

    Overall, bond issuances to the NBFC sectorremain tepid, and aggregate issuances are down 40 per cent Y-o-Y. ExcludingHDFC and LIC, bond issuances have been small in Sep-Oct-2019.

    Aggregate CP outstanding (financial +non-financial corporates) were down 17 per cent Y-o-Y in Sep- 2019. Moreover,the CP market continues to differentiate across NBFCs. The better-perceivedNBFCs have been the beneficiaries of the excess system liquidity and RBI's reporate cuts, with their incremental CP issuances now at <5.5 per cent. Incontrast, some of the other NBFCs like JM Fin and Piramal are still borrowingfunds at 9-10 per cent.

     

    Bankloans to NBFCs up 30 per cent Y-o-Y, MF down 25 per cent

    Mutual funds, on the other hand, have beencutting their exposure to NBFCs, with aggregate funding down ~30 per cent overthe past year to `2.9-tn currently. Some of the perceived-weaker NBFCs have seen MFfunding come down sharply by ~100 per cent. MF funding has increased only for acouple of stronger NBFCs (LIC HF and Bajaj, for instance).

    Bank lending to NBFCs continues to grow, up~30 per cent Y-o-Y in Sep-2019, now accounting for 8.5 per cent of bankingsector loans. Bank exposure to NBFCs has continued to increase and is at 10-16per cent of most of the PSU Banks, growing 15-30 per cent Y-o-Y, with thelow-LDR banks seeing stronger growth. With moderation in loan growth, PSU bankshave seen a further drop in their loan deposit ratios. Despite the moderationin loan growth for private banks, LDRs remain stretched at 90-110 per cent.

     

    NBFCsrelied on sell-downs for liquidity management

    Over the past year, given the tightness inthe debt markets, particularly with MFs reducing exposure to NBFCs by ~30 percent (~`1.2-tn), NBFCs have resorted to sell-downs to meet their debtobligations. Excluding some of the stronger NBFCs (HDFC, Bajaj Fin, LIC, andREC), the aggregate AUM growth has been muted at ~`150-bn,and the `660-bn reduction in MF funding has been met by sell downs.

     

    Divergenttrends now even in sell-downs

    Given the tightness in liquidity, NBFCshave been selling down loans to meet their funding needs and there is nowdivergent trends emerging amongst NBFCs. While the pace of sell-downs has beenrising for most NBFCs, with 25 per cent of AUM already sold down by IndiabullsHF, the stock of ‘off-book AUM’ has declined over past two quarters, indicatinglimitations to further sell-down.

     

    LookingForward

    Industry experts opine that the sector isattractively placed in the context of improving liquidity conditions, lowerfunding costs, and lower credit spreads going ahead. They believe that largeretail finance NBFCs with strong promoter backing and well managed ALM shoulddo well going ahead, while consolidation/strategy recalibration among developerfinanciers will lead to higher market share and improved profitability forplayers like HDFC.

    Industry experts believe that large retailfinance NBFCs with strong promoter backing and well-managed ALM should do wellgoing ahead. Moreover, consolidation/strategy recalibration amongst developerfinanciers will lead to higher market share and improved profitability forplayers like HDFC. HFCs with high leverage and concentration risks too willraise equity, lower their concentration and consolidate their book. Industryexperts also claim that liquidity conditions and funding costs will continue toimprove going into FY21E.

     


     

    Securitization emerged as a key fundraising tool with the volume of securitisations for the industry jumping 48 percent Y-o-Y to `1.0-trillion in 1HFY20.

     

    Over past year, MFs have cut NBFC exposureby 30 per cent. NBFCs have tided over this largely through increased sell-downsand higher bank funding.

     

    Given the tightness in liquidity, NBFCshave been selling down loans to meet their funding needs and there is nowdivergent trends emerging amongst NBFCs.


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