Chennai: Non-banking finance companies are expected to post strong numbers for the December quarter, helped by the low base in the year-ago quarter. However, that does not give a true picture of the sector. On a sequential basis, NBFCs are expected to report another soft quarter, find analysts.
The Q3 of FY29 was preceded by the IL&FS default in September and hence it was an exceptionally weak quarter. Against this low base, Q3 FY20 would appear a strong quarter. However, slowing economy, limited availability of funds and conservative lending practices still haunt NBFCs, according to Emkay Global. Weak asset under management (AUM) growth sequentially, along with consistent pressure on margins and elevated credit costs will keep the bottom line under constraints.
While the quarter started out on a positive note over festive demand across categories, the post-festive season has been muted, especially on vehicle financing, says Motilal Oswal Financial Services (MOFSL). The supply of money from the capital markets to NBFCs remains tight and there is a clear trend of polarisation as good companies with strong parentage are getting disproportionate money.
MOFSL expects housing finance companies to lose market share to banks in the core home loan segment. HFCs with good parentage are likely to deliver healthy retail growth due to a moderation in competitive intensity from smaller HFCs. However, the non-retail segment will continue witnessing moderation for all companies.
Futher, margins will remain under pressure due to elevated cost of funds. NBFCs have been switching towards longer-tenure bank borrowing, from capital market funding, as it is a relatively stable source of funding with lower volatility. However, it comes at a higher cost. Emkay expects NBFCs to report sequentially flat margins in Q3.
Asset quality remains a key monitorable in this earnings season. There has been increase in delinquencies in loan against property and medium and heavy commercial vehicles financing on an industry-wide basis. Home loans and other products in vehicle financing are still maintaining largely stable asset quality. Lower resale rates may increase the ultimate losses and impact provisioning. Asset quality performance in corporate loans will be a key monitorable, says MOFSL.
Emkay too expects moderate retail stress with a flat-to-minor rise in non-performing asset ratios. However, the risk in the property developer portfolios would continue.