Analysts cheer M&M Financial's move to remain NBFC

Requirement to meet CRR and SLR, technology costs and difficulty in shifting all branches to banking platform in 18 months were risks

Shares of Mahindra and Mahindra Financial Services (MMFS) ended firm today, erasing early day losses, after some analysts said the company’s decision not to apply for a banking licence augured well for its prospects. The stock rose 2.8 per cent to close at Rs 243.10 today, after dropping as much as 6.9 per cent.

“This is a sensible step because if MMFS was to become a bank, it would have entailed significantly higher costs/risks,” said JM Financial’s analysts, led by Karan Uberoi, in a note to clients.

The requirement to meet cash reserve and statutory liquidity ratios, technology costs, and difficulty in shifting all branches to the banking platform in 18 months were risks, the note said.

“It was also difficult to convert all its existing 657 branches to the banking platform in 18 months. Thus in our view, converting to a bank would have impacted return ratios negatively in the near/medium term,” said the analysts, while maintaining a ‘buy’ rating on the stock with a price target of Rs 275. MMFS’ shares fell eight per cent yesterday after the company announced during trading hours that it did not want to become a bank.

Deutsche Bank sees MMFS’ decision not to apply for the banking licence and to stay as a non-banking finance company (NBFC) as a positive. “We believe if NBFCs are required to convert to a bank, then it would be earnings — dilutive in the medium term, besides leading to significant operational challenges,” said Deutsche’s analysts Manish Shukla and Manish Karwa in a client note, while maintaining their ‘buy’ rating for the stock with a price target of Rs 265.

July 1 is the last date to apply to the Reserve Bank of India for a banking licence.

MMFS shares, which hit a 52-week high of Rs 287.50 on June 19, gained almost 50 per cent from April 1 till last weekend, on expectations that the NBFC was one of the top contenders for a licence. “This announcement, in our view, could potentially result in erosion of valuation premium that the company was commanding on account of the potential bank licence award,” said JP Morgan’s analysts led by Saurabh Kumar, in a client note.

“While the other NBFCs have not yet made final announcements on their bank applications as yet, we note that challenges highlighted by MMFS’ board could be faced by others, too, resulting in some valuation erosion given medium-term headwinds on growth / returns,” said the JP Morgan analysts.