India's non-bank lenders could be entering a fresh unsecured credit growth cycle, led by a recovery in personal loans, according to UBS, which expects healthy asset quality, abundant system liquidity and a more risk-on stance among lenders to support growth.
UBS upgraded L&T Finance to Buy from Neutral and raised its target price to Rs 380 from Rs 350. It also upgraded Bajaj Finance to Neutral from Sell and increased its target to Rs 1,100 from Rs 910.
The brokerage said India is entering a strong unsecured credit growth cycle, with personal loans likely to lead the next phase of growth. Unsecured lending has remained broadly flat as a share of household leverage over the past three years, while asset quality has improved across several segments.
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UBS expects personal loan growth to accelerate to around 30% for NBFCs and 9% for banks. It sees this recovery benefiting private banks and large NBFCs with established personal-loan franchises.
L&T Finance, Bajaj Finance In Focus
For L&T Finance, UBS expects faster personal-loan growth and an improvement in return on assets towards 3%, supporting its upgrade to Buy. Its revised FY28E EPS estimate stands at Rs 21, versus Rs 20.20 earlier, while the target multiple has been raised to 18 times from 17 times, resulting in the Rs 380 target.
For Bajaj Finance, UBS expects cyclical earnings upgrades as yield-accretive growth combines with strong asset quality. However, the brokerage continues to see valuation as demanding, keeping the stock at Neutral despite raising its target to Rs 1,100. Its FY28E EPS estimate rises to Rs 49 from Rs 48.50, with the target P/E increased to 22 times from 19 times.
UBS also sees easing pressure from gold loans as gold prices stabilise. It views moderation in gold-loan growth as a potential substitute for renewed personal-loan growth.
Despite expectations of higher interest rates, UBS does not see a rate hike as a major earnings risk for NBFCs. It said funding conditions could remain supportive because of surplus system liquidity and expected FCNR-B inflows.
The brokerage also noted that large diversified NBFC stocks have already fallen 2–10% over the past month, with the market pricing in a rate hike and weaker margins.
UBS maintains Buy ratings on Poonawalla Fincorp, Cholamandalam Investment and Finance and Shriram Finance, while remaining Neutral on HDB Financial Services, SBI Cards and M&M Financial Services.
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