Shares of Non-Banking Finance Companies Richly Valued?

Shares of non-banking finance companies have been on fire in the last few months. After a slowdown in the balance sheet growth of most government-owned banks, due to asset quality pressures, investor interest seems to have shifted to NBFCs.

Stocks such as Bajaj Finance and Muthoot Finance have run up as much as 23 percent in the last 1 month as compared to the 12 percent gain in Canara Bank – the best performing stock in the Bank Nifty.

NBFCs also rank higher than banks on market capitalisation-to-loans ratio. For instance, Bharat Financial Inclusion’s market capitalisation is 125 percent of its loan book, and for Bajaj Finance it is 111 percent. In the case of both the ratio is much higher than for say, HDFC Bank’s 67 percent. And in the case of government-owned banks, this ratio is much lower, below 10 percent for most banks except State Bank of India.