Why Brokerages Are Cautious About Non-Bank, Public Sector Lenders

At a time when banks grapple with increasing borrowing costs and bad loans, international brokerages advise caution on non-bank and state-run lenders.

Morgan Stanley, in its latest report, said increasing interest rates could reduce growth opportunities for non-banking financial services companies. The cyclical tailwinds that such lenders enjoyed in recent years – easy liquidity and low rates – are behind now, it said. “To that extent, addressable opportunities will shrink for some and valuations will have to adjust.”

State Bank of India recently hiked the rates to which it benchmarks home loans, and many other lenders followed suit. Liquidity in the banking sector too has shrunk to the levels seen before demonetisation.

Morgan Stanley

• The only pockets among the non-bank lenders that Morgan Stanley prefers are the niche lenders that offer small-ticket, short-tenor loans.
• While such segments have higher bad loans, risk-adjusted spreads are also high.
• Expects most NBFCs to de-rate over the next year since rising rates are negative for the sentiment.
• Earnings growth at NBFCs will remain strong as GDP growth is expected to pick up.
• Downgraded Indiabulls Housing Finance and Aditya Birla Capital to ‘Underweight' from ‘Equalweight'
• Retained Shriram Transport Finance and Mahindra & Mahindra Financial Services at ‘Overweight'

Credit Suisse

Credit Suisse said large bond holdings of public sector banks can lead to temporary setbacks in their financial performance amid rising yields. Their bond holdings have crossed the limit mandated by the Reserve Bank of India.

Rising bond losses will add to concerns on the adequacy of the government's Rs 2.11 lakh-crore recapitalisation plan, Credit Suisse said.

“PSU banks are staring at a potential treasury loss of over Rs 20,000 crore in the March quarter, given their large bond holdings and continued uptrend in bond yields,” the brokerage said. The treasury losses are estimated to be thrice the level in the December quarter.

Key Highlights

• Over-ownership of SLR bonds by banks likely to weigh on bond markets
• Over-ownership of SLR bonds by banks equates to around 4 years of annual demand.
• Continue to prefer private lenders despite the steep correction in public sector banks.

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