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Non-banking finance companies have outperformed private banks in terms of financial performance in the June 2016 quarter by a wide margin.
Though both’s businesses are not directly comparable due to different customer profile, regional presence and business models, both are judged on common parameters - loan book, cost of funds, net interest margin and asset quality. Besides, many NBFCs are increasingly compared with private banks on the growth front.
Net interest income of 16 NBFCs on an aggregate basis has jumped 21 per cent year on year to Rs 12,898 crore compared with 15 per cent growth reported by 11 private banks to Rs 24,597 crore in the June 2016 quarter, according to data provided by Capitaline. While NII growth y-o-y for NBFCs saw improvement from of 7 per cent compared to March 2016 quarter, the same for private banks have deteriorated from 21 per cent.
“From the beginning of 2014, the yield on 10-year government bonds, a rough proxy for wholesale borrowing costs of NBFCs, has come down by about 150 basis points. Over the last two years, the overall loan book of NBFCs grew at 16% annually, or almost twice as fast as bank credit growth over the same period,” pointed out Morgan Stanley in a report.
Thus a combination of robust loan book growth and decline in cost has led to NBFCs reporting a jump in their topline (NII).
Net profit of NBFCs has leaped by 26.4 per cent y-o-y to Rs 5,563 crore compared to a decline of 4 per cent y-o-y witnessed in the previous quarter. The same for private banks has also picked up at 3.4 per cent compared to a negative growth of 14 per cent.
Robust bottomline performance by NBFCs is despite not compromising on asset quality. Average gross non-performing assets (in terms of percentage of advances) of NBFCs have been stable y-o-y as well as sequentially unlike private banks, which have seen the same inching up slightly in the both period.
Shares of many NBFCs have been roaring on the bourses as analysts continue to expect better and robust outlook for many.
Shares of 10 NBFCs -- Bajaj Finance, Bajaj Finserv, Bharat Financial Inclusion, Can Fin Homes, Cholamandalam Investment and Finance Company, Edelweiss Financial Services, IIFL Holdings, Repco Home Finance, Shriram City Union Finance and Shriram Transport Finance touched new 52-week high levels today.
“Valuation of NBFCs is not cheap. 75-80 per cent of multiple expansion has already happened. Given a choice, I am more comfortable with valuation of small private sector banks than NBFCs at the current juncture,” said Pankaj Sharma, head-research, Equirus Securities.
Average valuation of NBFCs at 3 times on FY18 price to book value basis is now more than private banks’ 2.5 times.
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