JM Financial sets out its outlook on the NBFC space for 2021 saying that the sector is well-placed for a strong revival. The brokerage forecasted FY22E PAT (profit after tax) growth of current 60 percent YoY for diversified NBFCs and vehicle financiers. For housing financiers, it expects current 15 percent YoY growth.
The brokerage feels that the revival in the demand will be driven by, a) significantly improved, diversified and granular liability profile, b) resilient ALMs (asset liability management) with highest ever on-BS (balance sheet) liquidity, c) continued fall in spreads and rates.
NBFCs currently boast stronger liability profiles. The brokerage believes improved borrowing profile and reduced risk aversion towards NBFCs sets the
foundation for a strong revival 2021 onwards.
The normalisation of on-BS liquidity and lower funding costs will aid margin expansion, report added. Bajaj Finance and HDFC stand out consistently with best-in-class ALM even prior to IL&FS.
On credit spreads, the brokerage explained that NBFCs incremental borrowing costs will lower further due to falling spreads, as 1 year AAA/AA credit spreads for NBFCs are down current 180/145 bps and 3year AAA/AA are down current 160/120 bps since the May, 2020 SPV(special purpose vehicle) announcement.
What will further boost NBFCs is their improving asset quality. "The space is now better placed given i) up to 270 bps of COVID-19 provisions, ii) significant improvement in collection efficiency, and iii) expectation of restructuring staying under control at 3-7 percent of the book," the report added.
All the aforementioned factors will aid the sector's growth to 14 percent in FY22 from 7 percent YoY in FY21, also on the back of economic recovery. Bajaj Finance remains in the top position to reap highest growth acceleration because of its diversified business.
"Our preferred picks from this space are Bajaj Finance, HDFC, M&M Financial Services and CIFC," the report concluded.
(Edited by : Jomy)