While loan growth should slow and delinquencies should rise in Q3, reported earnings could be steady as impact on reported asset quality, NII and provisions could be masked due to technical relief given by RBI on NPA recognition. We believe markets will focus on outlook for earnings and asset quality post Q3 when cash crunch eases and RBI relaxation expires. We believe growth and asset quality headwinds especially in segments like SME could last much longer.
Q3: slower loan growth
Q3, usually a seasonally exciting quarter (festive season, harvesting season), was hit by demonetisation. Disbursal slowed post demonetisation, though strong loan growth in Oct (earlier festive season vs. Nov last year) and carry forward impact in early Nov, prior to demonetisation, could cushion AUM in Q3. Delinquencies have increased across most segments (rural, 2 wheeler, used CVs higher impact), but this may not be fully reflected in reported earnings as NBFCs may apply 90 days relaxation on NPA recognition allowed by RBI recently. This would also lower income reversal, which coupled with lower interest costs could boost reported NIMs in Q3. We expect PAT growth at LICHF to be steady at 22%, while earnings growth at BAF and CAFL should moderate in Q3. While used CV and rural markets have been hit by demonetisation, profit and asset quality at MMFS and SHTF would be stable due to RBI relaxation.
Q3FY17 Preview: NBFCs
LIC Housing Finance (Buy)
We expect profit to grow 22% y-o-y. With demonetisation likely to affect disbursal, AUM growth should moderate to 12.7% y-o-y (Q2 14.9%). NIMs should expand 5 bps q-o-q due to refinancing of NCDs post maturity and higher spreads on new loans. Credit costs could rise slightly q-o-q. Asset quality should be largely stable despite demonetisation.
Shriram Transport (Hold)
We forecast profit to grow 6% y-o-y (Q2 15%). We expect AUM growth to slow to 10.7% y-o-y due to slowdown in CV disbursal. Collections improved in Dec vs. Nov lows. Reported GNPA and provisions should be stable and income reversal could be lower owing to RBI relaxation on NPAs. We expect NIMs to expand marginally q-o-q.
Mahindra Finance (Hold)
We expect profit of R1.07 billion (59% y-o-y, but off a low Q3FY16 base). We forecast loan growth to slow to 12.5% y-o-y (Q2 15%). Rural markets were hit post demonetisation, but strong disbursal in Oct and steady tractor sales in Dec may cushion Q3 AUM to some extent. Rural collections have been hit but this may not be reflected in reported GNPA.
Bajaj Finance (Underperform)
We expect profit growth to moderate to 25% y-o-y (49.7% 1HFY17) led by moderation in loan growth to 29% y-o-y (37% Q2). Consumer durable loan growth should slow due to strategic reduction and demonetisation impact. SME disbursal should also slow in Q3. We expect NIMs to be down 75 bps y-o-y due to lower consumer mix. Despite lower collection efficiency in 2W/3W segment, reported GNPA may be stable if BAF applies RBI relaxation.
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Capital First (Underperform)
We expect profit to grow 32% y-o-y (43% 1H). We forecast AUM growth to slow to 25% y-o-y in Q3 (Q2 32%). We expect NIMs to be slightly better q-o-q due to lower borrowing costs. Slippages in segments like 2W/3W, SME loans could rise, but reported NPA and credit costs could remain stable due to RBI relaxation.