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Risk aversion to HFC, NBFC debt may hit growth, says Jefferies

NEW DELHI: Many housing finance companies have asset liabili..

NEW DELHI: Many housing finance companies have asset liability mismatches in the oneyear bucket, and most non-banking finance companies are better positioned to pass through higher funding costs, states a Jefferies India report.

Mahindra Finance and Bajaj Finance are top picks for Jefferies; LIC Housing Finance is a buy and PNB Housing has been downgraded.

“Tighter liquidity outlook and higher risk aversion toward NBFC, HFC debt should lift funding costs and constrain growth,” said the report. Jefferies has cut FY19-20E EPS estimates by 2 per cent-13 per cent. It prefers niche NBFCs to housing finance companies, and NBFCs with strong parent and favourable ALM profiles.

Bajaj Finance, Mahindra Finance, and Shriram Transport Finance have positive ALM gap while most HFCs, excluding HDFC, have ALM mismatch in the less than oneyear bucket.

NBFCs in niche segments such as used commercial vehicles are better positioned to pass through higher funding costs while slow pace of lending rate increases by banks would constrain HFC lending rates, thus affecting spreads, the report said.

However, HFCs could cede market share to banks as rising rates improve the competitive advantage of lenders. With tight liquidity likely to constrain growth at mid-tier HFCs, those with strong lineage – HDFC and LICHF – could gain share, said Jefferies.

Bajaj Finance appears well positioned with positive ALM gap, strong parentage, AAA rating and diversified liability base. Its dominance in consumer financing is likely to sustain.

“Diversified loan book allows flexibility to scale back growth in lower RoA segments, if liquidity stays tight,” said Jefferies. “Despite this, loan growth should sustain at over 30 per cent in the next two years. We expect modest NIM compression, but Bajaj Finance has cost levers too.”

Mahindra Finance is preferred due to strong rural fundamentals, positive ALM gap, strong parentage and stronger pricing power in the rural segment. The research report is positive on Shriram Transport, given the positive CV outlook, comfortable ALM and stronger pricing power in the used CV segment.

The report downgraded PNB Housing Finance, given the ALM mismatch in the less than oneyear bracket and higher commercial paper mix, which should affect loan growth and spreads.

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