NBFC Stocks On A Roll: More Strength Left?

NBFCs stocks have been on a roll since the start of June, clocking gains in the range of 19-50 percent. The credit for those gains goes mostly to the softening in government bond yields that have fallen as liquidity conditions have turned comfortable. Since NBFCs borrow heavily from the markets and lend those funds in turn, a lower borrowing cost can translate into improved net interest margins (NIMs) for these firms.

The benchmark 10-year bond yield has fallen by about 70 bps, from 7.48 percent in June to 6.78 percent in September. This has impacted corporate borrowing costs as well. At the same time, easy liquidity conditions have meant that NBFCs have been able to raise funds through well-priced non-convertible debentures and replace higher cost bank borrowings.

The strong demand for personal loans, at a time when industrial credit growth remains weak, has also aided growth in this sector, especially for NBFCs focused heavily on retail loans. As a result shares of L&T Finance Holdings, Capital First, Shriram City Union Finance and Muthoot Finance have done very well.

Given the positive operating conditions, most analysts are optimistic about the sector for the next year or two, especially when compared to the weakness in public sector bank shares. Some analysts expect this will give well capitalized NBFCs an opportunity to gain market share.