After strong Q1, NBFC outlook for FY27 robust despite margin pressure

Strong AUM growth and steady credit demand support the outlook, though higher borrowing costs, competitive intensity and potential rate increases could weigh on margins

Most non-banking financial companies (NBFCs) had a good Q1FY27 with aggregate growth in net interest income (NII), operating profit and net profit in the high teens or even 20s.

 

The management guidance and commentary said credit demand had not been impacted much by the Iran war.

 

Most companies reiterated medium-term guidance. Asset quality stabilised. Growth was spread across most segments with power lagging.

 

Vehicle financiers saw good assets under management (AUM) growth and disbursement momentum.

 

The managements maintained growth outlook. AUM growth for housing finance companies (HFCs) was marginally lower than expectations.

 

LIC Housing Finance lowered its FY27 loan growth guidance to 8-10 per cent from 10-12 per cent earlier, but other HFCs maintained their guidance.

 

Growth rates for gold financiers have moderated, due to stabilisation in gold prices.

 

Following implementation of new loan guidelines, companies have introduced different products.

 

Power financiers reported weaker-than-expected growth with reduction in disbursement.

 

But the regulator’s undertone is hawkish and that has negative implications. 

 

In H2FY27, net interest margin (NIM) may be under pressure and the pressure on NIM may increase in FY28.

 

Shriram Finance could buck this trend because a credit rating upgrade may offset the trend of compression.

 

The recent Monetary Policy Committee (MPC) minutes indicate concerns around inflation and real rates, which increases the chances of rate hikes.

 

G-Sec yields moved up in March and April and have since eased. But corporate bond yields have inched up, indicating expansion in credit spreads.

 

Q1FY27 saw sequential increase in cost of borrowings with many lenders guiding for flat/10-15 basis points (bps) increase in cost of funds over the next nine months. This will lead to margin pressure heading into FY28 as well.

 

Following a strong Q1, NBFCs could still be poised for a strong FY27.

 

The market expects high AUM growth. Competitive intensity is also high and may reduce yields. Competition has intensified in the prime segment, due to aggressive public sector banks (PSBs), while newer NBFCs are competing aggressively in below-prime.

 

The share of retail/micro, small and medium enterprises (MSME) loans is increasing, which will lead to improved margins unless credit costs also spike.

 

One interesting variable is the replacement of non-convertible debentures (NCDs) that retire in FY27, which suggests there won’t be a big drag on margins for large high-rated NBFCs.

 

Around 2-6 per cent of total borrowings (maybe 20 per cent of NCDs) are due for redemption. The retiring NCDs carry 7.5-9 per cent costs while the incremental cost of funds is 7.7-8 per cent for large AAA-rated NBFCs.

 

If there is a 50 bps hike in repo rates over the next 12 months, this will lead to around 10-15 bps rise in cost of funds (CoFs) for most NBFCs.

 

Another key segment of NBFC sourcing is linked to the Marginal Cost of Funds-Based Lending Rate (MCLR) and those rates are also rising slowly.

 

A look at some of the NBFC majors may be illustrative of trends through FY27. Bajaj Finance — a big player with retail exposure — expects 10-15 bps rise in cost of borrowings for the rest of the year.

 

But gold and new loan segments are generating higher yields and the consumer durables business grew 40 per cent Y-o-Y in Q1FY27, supporting yields. 

 

Bajaj Housing, which makes less than 10 per cent contribution to consolidated NII of Bajaj Finance, has guided for margin compression of 20-25 bps.

 

Chola Finance has guided for flat margins with 10-15 bps rise in CoF. Conversion of compulsorily convertible debentures (CCD) and gold loans will support margins. But faster growth in heavy commercial vehicles (HCVs) could lead to yield pressures.

 

L&T Finance saw growth in the micro loans business in Q1 which will push up margins, but which is contrary to its past guidance.

 

The management says this segment will see slower growth in future and therefore, NIM may see a quarter-on-quarter (Q-o-Q) dip in FY28 over FY27.

 

LIC Housing Finance guided to maintain range-bound spreads in FY27, moving to the lower end of 2.5 per cent NIM in FY27 from 2.7 per cent in FY26.

 

There is severe pressure in incremental spreads and there may be further downsides. Mahindra Finance has a large fixed rate exposure with 92 per cent share of vehicles. Rise in rates will hit NIM and the company is looking to improve exposure in insurance to lift volumes.

 

However, it is also cautious on asset quality and unwilling to chase higher yields at higher risk.

 

Shriram Finance has seen large capital issuance which will boost margins due to lower leverage.

 

Low CoF due to ratings upgrades will reflect with a lag, probably from FY28 onwards.

 

Margins for FY27 will depend on liquidity tightening since the company has had surplus liquidity.

 

The company has guided that it will see a shift to new commercial vehicle (CV) financing that has lower yields, putting more pressure on yields.

 

Tata Capital had a recent capital issuance, a turnaround in the vehicle business and a shift to retail from corporate.

 

 This will boost margins. The company has guided for 10 bps NIM expansion for the year. The management guided that the pick-up in retail will start showing in the loan book. 

---

 

The writer is a New Delhi-based independent journalist