Top NBFCs preferred bets in financial space

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Mumbai: Even as the Bank Nifty index scales its highest level in nearly one and a half years, the true heroes in the financial space currently seem to be the non-banking financial companies (NBFCs).

National Stock Exchange’s Bank Nifty rose as much as 1.71% to 19,367.45 points on Thursday, a level last seen on 19 March 2015. The banking index is up 14.35% for the year to date, while Sensex added 7.69% in the same period.

“Incrementally, in recent times, investors are allocating more to NBFCs, as compared to banks. Off late, NBFCs have outperformed banks,” said Gautam Chhaochharia, head of research at UBS Securities India Pvt. Ltd.

Data from Capitaline showed that foreign institutional investors (FIIs) stepped up their holdings in NBFCs in the BSE 200 index to 42.59% at the end of the June quarter from 42.30% at the end of the March quarter.

While they hiked their stakes in private banks in the BSE 200 index to 36.33% from 35.75% in the March quarter, they trimmed their stake in state-run banks in the same pack to 6.94% from 7.46% in the quarter.

“Lower interest rates help NBFCs more, plus they don’t have the baggage of stressed assets like banks do. Banks are carrying on the legacy of bad assets,” said Chhaochharia.

A Mint analysis of banking and finance companies among BSE 200 stocks showed that all 19 NBFCs in this index posted positive stock price returns for the year to date. Also, two recently listed NBFCs—Equitas Holdings Ltd and Ujjivan Financial Services Ltd—have delivered 64.18% and 115.80% returns, respectively, from their issue price to date.

The best performing NBFCs so far in 2016 are Cholamandalam Investment & Finance Co. Ltd, Bajaj Finance Ltd and Bharat Financial Inclusion Ltd, which have jumped 74.71%, 69.16% and 59.50%, respectively.

On the other hand, of the 15 private banks in this index, two have seen their stock prices falling for the year to date. Of the 25 state-owned banks, only 11 have delivered positive returns so far in 2016.

Banking and financial companies are held mostly by FIIs and mutual funds, among sectors. They figure in the portfolios of most fund managers and other investors, who seek an exposure to India’s growth story.

NBFCs improved their performance on most metrics in the last fiscal year, as the banking industry struggled under the weight of a growing pile of bad loans, said the Reserve Bank of India (RBI) in a 28 June report.

NBFC loans expanded 16.6% in the year, twice as fast as the 8.8% credit growth across the banking sector on an aggregate level, according to the financial stability report (FSR) released by the RBI in June. The aggregate balance sheet of the NBFC sector expanded 15.5% in fiscal year 2016 compared with 15.7% the previous year, the report said.

NBFCs have gained a share in total credit in Asia’s third-largest economy. A report from Boston Consulting Group (BCG) and Confederation of Indian Industry (CII), dated December 2015, showed that their share of credit rose to 13% in 2015 from 10% in 2005.

Also, in the narrow market segments, the share of NBFCs was even more pronounced. In home loans, housing finance companies’ share has gone up to 38% in fiscal year 2014-15 from 26% in fiscal year 2008-09, the BCG-CII report said, adding that their shares were dominating in micro finance, two-wheelers and consumer durables too.

“Indian economy has a huge latent credit demand fuelled by massive self-employed population that is underserved by banks due to inadequate income proof,” BCG said in the report.

With state-run banks under severe stress due to mounting bad debt, their appetite to lend is expected to be weak in the medium term till a proper resolution can be found, and this will increase the gap in the market, providing an opportunity for NBFCs to fill in.

“India is hugely underbanked, and there is a huge scope for NBFCs for getting more business from unexplored areas. There is a big opportunity out there. Interest rates have also come off, giving a margin boost to NBFCs,” said Vaibhav Sanghavi, managing director of Ambit Investment Advisors Pvt. Ltd.

“So, on one hand, there is revenue potential and revenue growth, and to add to this, margins are aided by decreasing cost of funding. It is a win-win situation for NBFCs,” added Sanghavi.

On the flip side, the recent rally may have made the valuations expensive for the NBFC space. Certain NBFCs such as Gruh Finance Ltd and Bajaj Finserv Ltd were trading at 10.77 times and 10.18 times 1-year forward price-to-book, respectively. These valuations were higher than all the banks in the BSE 200 index.

“To an extent, the valuations for NBFCs are looking stretched, but they can be good buys on market correction,” said Sanghavi.