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Nomura: Retain cautious view on wholesale NBFCs/HFC

Rate transmission had been slow from Aug-18 to May-19 due to tight liquidity, but with tax sops and easier liquidity, transmission should pick up and the repo-linked pricing by SBI will determine how much of the tax-related benefits are being passed on by banks, in our view.

Corporate banks have a higher proportion of mortgages and MSME loans.
Corporate banks have a higher proportion of mortgages and MSME loans.
Corporate banks have a higher proportion of mortgages and MSME loans.
Corporate banks have a higher proportion of mortgages and MSME loans.

We believe the first week of October will be important for India banks/HFCs given that: Banks will announce their external benchmark product pricing on 1 October (SBI has decided to link pricing with repo rates), and RBI is likely to front-end the rate cut in the upcoming policy meet (we expect 40bps cut). Rate transmission had been slow from Aug-18 to May-19 due to tight liquidity, but with tax sops and easier liquidity, transmission should pick up and the repo-linked pricing by SBI will determine how much of the tax-related benefits are being passed on by banks, in our view.

We believe that retail banks will be better off given that majority of retail loans (ex-mortgages) are floating rates. Corporate banks have a higher proportion of mortgages and MSME loans. Rate action on mortgages by banks, especially SBI, will be important for HFCs as repo-linked pricing is likely to be followed by a rate cut. Current incremental mortgage spreads are very comfortable at ~130bps (mortgage rate of 8.5%), but will have a two-step drop (repo-linked pricing followed by a potential rate cut).

Overall, we continue to prefer private corporate banks in the financials space followed by select insurers and then retail banks. We continue to retain our cautious view on wholesale NBFCs/ HFCs. Frontline HFCs’ valuations are undemanding, but we will need to track repo-linked mortgage pricing by banks.

Two important events related to the loan pricing in Oct-19: RBI on 3 September 2019 had mandated that banks’ benchmark floating retail loans (mainly mortgages) and MSME loans to repo/3-6 month government yields or certain external benchmark rates from Oct-19. SBI has decided that RBI’s repo rate will be its benchmark rate and we will get to know about the pricing of floating rate loans linked to the external benchmark on 1 October 2019.

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