Analysts See More Risk For These NBFCs Amid Liquidity Worries
Non-bank lenders with more liabilities than assets maturing in the next one year may see the cost of funds increase, hurting their growth, according to brokerages.
The non-banking financial services companies having a negative asset-liability gap will see a larger impact on margins as they will have to refinance short-term debt at a higher cost, Jefferies, Edelweiss Securities and Antique Broking said in separate notes. The most vulnerable would be the ones with a bigger mismatch and low pricing power, making it difficult to pass on the costs to consumers, they said.
Concerns stem from a string of defaults by IL&FS Ltd. and its subsidiaries whose commercial paper has been downgraded to junk by rating agencies. Investors have turned cautious about non-banking financial services companies, especially mortgage lenders, sending yields higher on their commercial paper.
Sale of Dewan Housing Finance Ltd.’s AAA-rated bonds by DSP Mutual Fund at a rate usually sought for paper with lower credit profile had triggered the Friday’s selloff, with the mortgage lender’s shares tumbling as much as 60 percent. While the stock has since rebounded, non-bank lenders’ shares remain under pressure.
Mutual Funds May Not Roll Over Debt
Debt mutual funds have become active lenders to NBFCs through short-term commercial papers and long-term non-convertible debentures. In all, they have deployed 17 percent of debt assets under management in NBFCs, according to UBS.
That raises concerns of risk aversion as fund houses may not be keen to roll over commercial paper that matures in the next few weeks, brokerages including Credit Suisse and Jefferies said, explaining why the cost of funds could increase for non-banking financial companies.
The share of market borrowing—through commercial paper and NCDs—has also grown for most non-bank lenders. In the next six months, according to a Credit Suisse report, over 40 percent of NBFC debt papers are due for refinancing. The ones with a higher proportion of short-term market debt would be more at risk.
According to Jefferies, four housing finance companies have more liabilities coming up for repayment than their assets maturing in the next 12 months. These are PNB Housing Finance Ltd., LIC Housing Finance Ltd., Dewan Housing Finance Ltd. and Repco Home Finance Ltd.
Brokerages are most worried about Repco. Here's their take on each one of the four:
- Despite LIC Housing Finance having the highest dependence on bond market, Kotak Securities derives comfort from its strong parentage which could ensure steady funding.
- Kotak Securities retained ‘Reduce’ rating on PNB Housing Finance, saying uncertainty on ownership may lead to some risk to the bond yields.
- Edelweiss downgraded Repco Home to ‘Hold’ from ‘Buy’, citing the adverse asset-liabilty gap.
- Edelweiss said that given the more than 45 percent correction, Dewan Housing is a high risk-high return play.
For most non-bank lenders, there wouldn’t be a problem because more assets than liabilities will mature in the next 12 months. Moreover, funding won’t be an issue for other well-rated non-bank lenders with strong parentage such as HDFC Ltd., Bajaj Finance Ltd and Mahindra Finance Ltd., according to Kotak Securities and Jefferies.
Brokerages Prefer Banks
- Pruned earnings estimates for NBFCs by 5-15 percent for the ongoing and the next financial year and reduced valuation multiple estimates by 20-30 percent.
- HDFC and Shriram Transport are its preferred picks
- Prefer ICICI Bank and HDFC Bank
- ‘Underweight’ stance on housing finance and wholesale finance firms given their lower pricing power.
- Positive on NBFCs involved in niche segments like gold loans, commercial vehicle and two-wheeler loans and microfinance where demand environment is strong and pricing power is reasonable.
- Valuations have corrected far in excess of the earnings profile for some of the niche NBFCs and risk-reward is getting favorable by the day.
- Prefers banks as they continue to enjoy easier access to liquidity driven by their deposit base.