 "Nomura, Nomura Holdings")
File photo of the logo of Nomura Securities is seen at the company’s Head Office in Tokyo, Japan. (Photo: Reuters)
Nomura on NBFCs: International brokerage firm Nomura has raised its target prices for several major NBFC stocks, citing a potential rate cut as a positive development for these companies.
The Japanese brokerage firm has increased its target prices for the following NBFCs – SBI Card to Rs 700 (earlier Rs 625), M&M Financial Services to Rs 280 (earlier Rs 250), Cholamandalam Investment and Finance Co to Rs 1,300 (earlier Rs 1,200), Shriram Housing Finance to Rs 3,800 (earlier Rs 3,500), Bajaj Finance to Rs 7,500 (earlier Rs 7,200), and Bajaj Finserv to Rs 1,930 (earlier Rs 1,780).
“We expect the impact of a rate cut cycle on the NBFCs to be uneven, largely due to differences in their asset and liability structures. While a policy rate cut is positive for NBFCs, we will have to juxtapose the net interest margin (NIM) dynamics with growth/ asset quality trends to take a holistic approach in terms of stock selection,” Ajit Kumar, Parth Desai, Param Subramanian and Ankit Bihani of Nomura said in a note.
Meanwhile, on the bourses, Indian NBFC stocks have seen major rallies in the past month, with the BSE data showing increases of up to 18 per cent. Among individual stocks, SBI Card rose over 14 per cent, M&M Fin 9 per cent, Cholamandalam Investment 15 per cent, and Bajaj Finserv up to 18 per cent. This growth, analysts believe, was attributed to increased market anticipation of a policy rate cut.
On the flipside, Nomura has lowered its target prices for CreditAccess Grameen and LIC Housing Finance by approximately 12 per cent and 3 per cent, respectively, setting new targets of Rs 1,150 and Rs 700. This reduction, they believe, reflects anticipated challenges related to a potential rate cut for LIC Housing Finance and asset quality concerns for CreditAccess Grameen.
Rate cut implications:
Regarding the implications of a rate cut for NBFCs, analysts noted that asset composition is more crucial than liability composition.
A 50 basis point repo rate cut could impact NBFC NIMs by -25 to +30 basis points. The current spread between the 10-year G-sec and the repo rate has narrowed to 0.4 per cent, compared to the long-term average of 1.2 per cent. Similarly, the spread between 3-year NBFC AAA yields and the repo rate has reduced to 1.2 per cent, against a long-term average of 1.7 per cent. This suggests that the bond market anticipates considerable future rate cuts from the Reserve Bank of India (RBI), analysts said.
Nomura’s scenario analysis further indicated that the impact of rate cuts on NBFCs’ NIMs and return on assets (RoAs) will vary.
NBFCs like SBI Cards, Shriram Housing Finance, and M&M Financial Services, with predominantly fixed-rate loan books, will be less affected by repricing in the near-term. In contrast, LIC Housing Finance, with a nearly entirely floating-rate loan book, may face a negative impact.
Bajaj Finance (consolidated) might see a negative effect on yields due to a higher proportion of mortgage loans, though Bajaj Finance (standalone) should be relatively insulated, given its majority fixed-rate loan book. Meanwhile, Cholamandalam Investment and Finance Co may see a marginal negative impact on its yield profile due to its floating rate home and LAP loans.
Positive impact on FY26 cost of funds
The positive impact on the FY26 cost of funds due to rate cuts is expected to be around 20-40 basis points, compared to a 50 basis point repo rate cut, analysts said.
“The quantum would depend upon funding mix, composition of bank borrowings (Fixed vs MCLR vs Repo/T-bill mix), maturity profile of deposits/ bond borrowings and repricing risk on those deposits/ bond borrowings,” analysts said.
SBI Cards, with a shorter-tenure liability book, is likely to benefit the most from a reduction in the cost of funds. On the other hand, the positive impact on CoF would be in a close-knit range for other NBFCs.
Moreover, combining the effects on yield and cost of funds, SBI Cards and auto financiers are anticipated to benefit the most in terms of NIMs. Bajaj Finance (consolidated) is expected to be neutral regarding rate cuts, while Bajaj Finance (standalone) is likely to see improved NIMs, analysts at Nomura said.
Impact on Return on Assets (RoA)
In terms of return on assets (RoA), SBI Cards, M&M Financial Services, and Shriram Housing Finance are projected to be the biggest beneficiaries, while LIC Housing Finance is expected to experience a negative impact.
The impact on earnings per share (EPS) will vary widely based on RoA levels, with LIC Housing Finance potentially seeing up to a 14 per cent EPS reduction if a 50 basis point rate cut occurs.
First Published: Sep 12 2024 | 9:50 AM IST
