NBFCs ripe for re-rating, says Nomura; bets on SBI Card, Bajaj, Shriram Fin

NBFC share price: Nomura, however, is negative on CreditAccess Grameen and M&M Financial Services

Nomura on NBFC stocks to buy: Non-bank finance companies (NBFCs) stocks may soon see re-rating from analysts, global brokerage Nomura said in a report on February 21, 2025. This would be driven by twin benefits of favourable risk-reward in select stocks, and improved profitability ahead.

 

"After a challenging period, performance of NBFCs in the December quarter of the current financial year (Q3FY25) suggests a potential inflection point. Credit costs appear to have peaked, setting the stage for improved profitability in the coming quarters," Nomura said.

 

Top NBFC Stocks to Buy, Sell

 

As its top picks in the NBFC sector, Nomura is bullish on Shriram Finance stock, which boasts of 15-16 per cent asset under management (AUM) growth with around 15-16 per cent return on equity (RoE). The Shriram Finance share trades at 9x FY27F earnings per share (EPS), making it highly attractive from investment view point.

 

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That apart, Nomura has a ‘Buy’ rating on Bajaj Finance (EPS CAGR of 29 per cent with average RoA/RoE of 4.1 per cent/21 per cent expected over FY26-27), and SBI Cards (with EPS CAGR of around 45 per cent with average RoA/RoE of 4.5 per cent/21 per cent expected over FY26 27) in the large-cap segment.

 

Among mid-cap NBFCs, Nomura has a ‘Buy’ rating on Five Star Business Finance share price, and Aadhar Housing Finance share price.

 

On the flipside, Nomura is bearish on M&M Financial Services (auto financier with a subdued RoE), and CreditAccess Grameen (higher MFI stress). It is ‘Neutral’ on Cholamandalam Investment and Finance Company (moderation in growth expected).

 

Explained: Reasons why Nomura is bullish on NBFCs

 

1) Loan disbursements to pick up

Nomura analysts believe with the Reserve Bank of India (RBI) cutting repo rate in the coming months, thereby easing tight liquidity conditions, loan disbursements by NBFCs could improve in upcoming quarters, especially for NBFCs focused on SME loans, Loan Against Property (LAP) used vehicles loans, and affordable housing loans.

 

In the recently concluded quarter, Nomura noted that the nine NBFCs under its coverage reported AUM growth of 19 per cent Y-o-Y (vs 23 per cent/20 per cent Y-o-Y growth in Q3FY24/Q2FY25), with disbursements growing at 10.6 per cent Y-o-Y in Q3FY25 (vs 10 per cent/17 per cent in Q2FY25/ Q3FY24).  READ: Nuvama bets on QSR, jewellery sectors post Q3, picks Jubilant, Titan, Trent

 

2) Stable Cost of Funds, Margins

With the RBI delivering its first repo rate cut in the February MPC meeting, Nomura expects better net interest margins (NIMs) ahead for NBFCs.

 

It estimates every 50-basis point repo rate cut to support Return on Assets (RoA) by 10-25 bps. It sees SBI Cards, M&M Finance, and Shriram Finance benefitting more, while LIC Housing Finance could be negatively impacted.

 

"While yields remain under pressure due to slower growth in high-yielding segments such as unsecured loans and increased competition in secured lending, we expect margin pressure to ease as funding costs decline," Nomura said.

 

That said, near term pain in CoF may persist, driven by declining growth of bank loans to NBFCs forcing the latter to diversify into expensive borrowing streams; rising marginal cost of funds-based lending rate (MCLR) for banks; spike in spreads of NBFC yields over G-Sec yields in recent months; and repricing of older bond borrowings at higher rates.

 

3) Peaking of Credit Costs

Q3FY25 saw a material jump in credit costs for NBFCs, especially the ones focused on unsecured loans, such as SBI Cards and CreditAccess Grameen. Costs moderated for LIC Housing and M&M Finance, while inched up marginally for Bajaj Finance, Cholamandalam Investment and Finance, Shriram Finance, and Five Star Business Finance.

 

Going ahead, Nomura expects credit costs to remain stable in FY26 on the back of plateauing delinquencies in the unsecured personal/credit card segments, moderation in expected credit loss (ECL)/ exposure at default (EAD) levels, and moderation in write-offs.

 

NBFC Share Price Today

Reacting to the report, Shriram Finance share price was trading 1.5 per cent higher in early stock market session today. LIC Housing Finance share price, Bajaj Finance share price, Bajaj Finserv share price, Aadhar Housing Finance share price, M&M Financial Services share price, and Five Star Business Finance share price were up in the range of 0.1 per cent to 1.86 per cent.

 

On the downside, SBI Card share price was down 0.44 per cent. By comparison, the benchmark Nifty50 index was flat at 9:20 AM.