Financials tank as fiscal package disappoints markets; Nifty Bank slips 5%

Nifty Bank, Nifty Private Bank and Nifty PSU Bank indices were down 5 per cent each as compared to 2.4 per cent decline in the Nifty 50 index.

Shares of companies that provide financial services, including banks, non-banking financial companies (NBFCs) and housing finance companies (HFCs), tumbled up to 12 per cent on the BSE on Monday amid concerns that asset quality metrics may come under pressure due to the extended nation-wide lockdown and challenging economic environment.

Besides on Sunday, Finance Minister Nirmala Sitharaman said that the government will make provisions in the law to exclude all debt associated with the coronavirus pandemic from defaults covered under the Insolvency and Bankruptcy Code (IBC), while suspending bankruptcy proceedings for one year.

"Suspension of IBC proceedings for one year though essential in these times, would postpone the pain for Banks and NBFCs and they could see large slippages and lower recoveries post the 1 year period," said Dhiraj Relli, MD & CEO, HDFC Securities .

At 09:56 am, Nifty Bank, Nifty Private Bank and Nifty PSU Bank indices were down 5 per cent each, while Nifty Financial Services index slipped 4.3 per cent, as compared to 2.4 per cent decline in the Nifty50 index.

Mahindra & Mahindra (M&M) Financial Services, Cholamandalam Investment and Finance Company, Indiabulls Housing Finance, ICICI Bank, Bajaj Finance, Shriram Transport Finance Company, Axis Bank and SBI Life Insurance from the Nifty Financial Services index were all down over 5 per cent on the NSE. Non-index stocks like IndusInd Bank, Bandhan Bank, L&T Finance Holdings, GIC Housing Finance, Ujjivan Financial Services and LIC Housing Finance slipped more than 6 per cent each.

Among individual stocks, M&M Financial Services tumbled 12 per cent to Rs 149 on the NSE, after reporting 66 per cent year on year (yoy) fall in consolidated net profit at Rs 239 crore for the March quarter of 2019-20 (Q4FY20) due to higher provisions. The company had posted a net profit of Rs 701 crore in the corresponding quarter a year-ago.

M&M Financial Services is primarily in the business of financing purchase of new and pre-owned auto and utility vehicles, tractors, cars, commercial vehicles, construction equipment and small and medium enterprises (SME) financing.

In order to cover the contingencies that may arise due to Covid-19 pandemic, the company has incorporated the management overlays in the impairment loss allowance and the total provision during the quarter stood at Rs 681.16 crore, it said in a release.

The outbreak of Covid-19 pandemic has resulted in further slowdown in economic activities across the country, which even otherwise was on a slow pace, it said.

M&M Financial Services’s net interest income (NII) rose by a paltry 3 per cent year-on-year to Rs 1,347.4 crore, which can be attributed to a subdued loan offtake. Loan disbursements of the company drifted down by 21 per cent yoy in Q4FY20, lowest at least in the last 14 quarters, while its assets under management (AUM) was up 12 per cent yoy to Rs 77,160 crore.

“We have baked in a 40 per cent drop in disbursements in FY21 as 1H is likely to see a plunge (60–70 per cent); we expect healthy, but gradual recovery from 2HFY21. With a higher share (75 per cent) of moratorium availed and collections issues, repayment rates are likely to be lower and thus support AUM,” Motilal Oswal Securities said in result update.

Forecasting asset quality and credit cost is challenging as they are likely to be guided by the easing of restrictions on Covid-19. The Red zone contributes around 30 per cent to AUM. The brokerage firm said it has baked in 3.9 per cent credit cost v/s 2.35 per cent in FY20 (ex-contingency provisions). 

Meanwhile, earlier this month, rating agency CRISIL had revised its outlook on Shriram Transport Finance Company’s (STFCL) long-term debt instruments, bank facilities and fixed deposit programme of the company to 'Negative' from 'Stable'.

The company largely caters to borrowers with modest credit profile and relatively under-banked customers. The borrowers of the company are primarily individual small road transport operators whose truck utilisation and income streams are more vulnerable to weak economic activity. Any delay in return to normalcy will put further pressure on collections and asset quality metrics. However, with the expectation of higher slippages, ability to maintain credit costs in line with historical levels will be a key rating sensitivity factor, CRISIL said.