Non-Bank Financial Institutions
0 01 India
Indian Non-Bank Financial Company Watch NBFC Growth Window Created by Banks’ Capital Pressures Market Share Gains: India’s NBFCs w ith 23% of the Sector Credit Market Share market at FY E19 have gained share from state-ow ned banks, w hich have the highest share of system credit. (%) NBFIs HFCs Banks Mutual funds Bank lending capacity has been constrained by w eak 100 3 4 6 6 5 capital due to asset-quality pressure and higher 80 capital requirements under Basel 3 norms. Distribution Channels a Strength: NBFCs have also 60 77 77 74 72 72 benefited from stronger grow th opportunities due to 40 better distribution channels for rural and semi-urban retail customers which are under-served by the banks. 20 6 6 7 8 8 14 13 14 15 15 NBFC Liquidity Stress to Persist: The failures of 0 FY15 FY16 FY17 FY18 FY19 IL&FS in September 2018 and Dew an Housing Finance in June 2019 sparked sector-w ider concerns. Source: Fitch Ratings, RBI, SEBI Higher Credit Growth for NBFCs than Banks Capitalization: Capital Deficiency Has Led to Mid-Sized Mid/s mall NBFIs and NBFIs w ith large, long-tenor SOE Banks Ceding Market Share construction-finance portfolios have been most (%) Nom. GDP NBFCs Banks (%) NBFIs Top 10 Banks Midsized SOE Banks affected. Near-term pressures are likely to persist. 40 20 Large asset-finance and consumer-finance NBFCs 16.2 32 14.8 14.9 15.6 controlled by larger corporates are less affected. 16 24 10.9 11.0 11.2 12 10.8 Reduced Pricing and Funding Flexibility: NBFC 8.9 7.8 7.7 6.9 business models that compete w ith banks have 16 8 weaker pricing and funding flexibility. Competition is 8 4 usually around corporate loans, large-ticket housing 0 0 loans, new commercial vehicle loans, and large-ticket FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY16 FY17 FY18 FY19 Considered Equity to assets (risk weighted assets used for banks as denominator) loans against property (LA P) – most of w hich are Source: Fitch Ratings, RBI Source: Fitch Ratings associated w ith greater concentration risks.
Note: Non-bank financial institutions (NBFIs) and housing finance companies (HFCs) are collectively termed non-bank Siddharth Goel Katie Chen Saswata Guha Jonathan Lee financial companies (NBFCs) in this report Director Associate Director Director Managing Director [email protected] [email protected] [email protected] [email protected]
www.fitchratings.com 3 October 2019 Non-Bank Financial Institutions
Assets (USDbn, FY19) Business Model Drives Credit Profiles Niche sector Niche mid-tier franchise Diversified lenders with a mid- Niche mid-tier franchise with leaders benefiting with limited sector tier franchise with some sector India has a diverse NBFC sector. Franchise strength is some sector vulnerability from scale vulnerability vulnerability 66.3 driven by lending competitiveness and scale w ithin the 70 market segment, w hich are the key factors behind the 56 sustainability of business models. 42 29.0 Sector leaders typically benefit from a strong franchise 28 15.7 17.4 15.2 15.3 15.3 12.1 and scale that underpins pricing pow er and profitability 9.7 8.3 7.8 14 5.5 4.4 4.3 6.9 4.8 7.5 2.9 4.0 3.0 2.2 and supports favourable funding access. NBFCs w ith 0
superior credit profiles generally have strong internal
IIFL
ECL
IBHL LTFH
ABFL capital generation to support grow th, and stable
STFC Chola DHFL
SCUF
HDFC
BajFin
LICHF
MMFS
TCFSL
Magma
PNBHF Hinduja
HeroFin leverage underpinning strong ‘BB’ range IDRs.
Sundaram
PiramalHF MuthootFin Source: Fitch Ratings Consumer lenders and asset financiers w hich have a
niche mid-tier franchise generally benefit from their Internal Capital Generation vs. Loan Growth regional and product-specific dominance, and are 5yr-avg. loan growth (%) typically less vulnerable to asset-quality contagion. 60 PNBHF Some large NBFCs have evolved more recently into 45 Hinduja diversified lenders w ith both w holesale and retail ABFL Bajaj Fin IBHF portfolios. Some deal w ith higher-risk sectors that have
30 LTFH Chola yet to be tested meaningfully through a credit cycle. STFC TCFSL Dewan HDFC Tighter regulatory supervision is a positive trend: 15 MMFS SCUF o Housing finance companies (HFCs) brought under Sundaram LICHF Magma Muthoot Fin direct Reserve Bank of India (RBI) supervision. 0 5 10 15 20 25 30 (5Yr-avg. ROE (%)) Bubble denotes loan size; o RBI to enhance onsite/offsite supervision, w ith an Orange indicates consumer financiers, Red indicates asset financiers, Green indicates wholesale lenders, White indicates HFCs increased focus on governance and pow ers to Source: Fitch Ratings remove management
o Recognition of impaired loans aligned w ith banks
o Phased introduction of a liquidity coverage ratio
o Stipulation of maximum leverage for HFCs
Non-Bank Financial Institutions 2 Non-Bank Financial Institutions
Asset Growth Supported by Leveraged Funding Structure Strong Growth with Leverage Stable (5-yr assets CAGR (%)) 60 Rapid grow th is a feature of the sector, w ith a 20% CAGR PNBHF in FY14-FY19 for large NBFCs (mainly asset finance, 45 Bajaj Fin Hinduja consumer, w holesale and housing finance companies), ABFL 30 HDFC against a backdrop of low interest rates and healthy IBHF Chola Dewan LTFH SCUF market liquidity supported by earnings and shareholder Muthoot Fin 15 MMFS equity. STFC TCFSL Magma LICHF 0 Sundaram Liquidity pressures since September 2018 have held back 2 3 4 5 6 7 8 9 10 11 12 the high sector grow th potential w hich w as underpinned by Bubble denotes asset size; (Leverage at end-March 2019 (x)) Orange indicate consumer financiers ,Red indicate asset financiers, Green indicate wholesale lenders, White indicate HFCs ongoing constraints on bank lending capac ity and NBFC Source: Fitch Ratings distribution channels w hich are better positioned. Sector Leverage Large retail-centric NBFCs remain best positioned due to less direct bank competition, low concentration risk, and (x) NBFI HFC credit have been struggling to grow due to their depleted capital on account 9 demand from an under-served market. of aggravated bad asset ratios. This, combined with low rate of stressed asset 8 Housing finance and w holesale financeresolution companies and show requirement a of higher capital due to Basel 3 norms, have 7 higher risk profile w ith on averageforced higher banks toleverage cede market share to NBFIs. 6 (measured by debt-to-equity) compared w ith other sub- 5 The recent liquidity crisis (post Il&FS) mainly impacted the medium/ small sectors. Wholesale financiers backed by corporate parents 4 sized NBFIs and NBFIs with large long tenor construction finance portfolio. 3 operate at higher leverage due to The the impact expectation of the crisis of on the large asset finance and consumer finance FY13 FY14 FY15 FY16 FY17 FY18 FY19 capital support from the parent. NBFCs as well as NBFIs controlled by larger corporate groups has been far less. Source: Fitch Ratings Higher leverage, w eaker fundingXXx access w ill constrain IDR Leverage not Changed Significantly for Most Non-Banks in the Last 5 Years ratings at the low ‘BB’ range w hich – w hen combined w ith business model vulnerabilities – couldXXX. lead to low er IDRs. ( x ) FY15 FY19 Consumer lenders Asset financiers Wholesale lenders Housing finance companies 12.3 14 11.4 HFCs’ leverage is driven in part by regulation, w ith a low er 12 10.49.7 10.5 10.6 10 8.2 risk w eighting and low er minimum capital adequacy 6.6 6.4 6.7 6.8 6.8 7.0 8 5.6 6.2 6.1 5.6 6.2 5.4 5.6 requirement. Recent, incrementally tighter regulations 5.6 4.4 4.6 4.9 4.8 4.5 5.0 4.8 5.3 4.9 6 3.8 3.5 4 2.7 3.0 have seen leverage converge tow ards other NBFIs. 2 0 Asset finance and consumer finance companies generally
operate w ith more conservative leverage and a longer
IBHL
LTFH
ABFL
STFC DHFL
Chola
SCUF
HDFC
BajFin
LICHF
MMFS
TCFSL
Magma PNBHF
Hinduja record of internal capital generation to support grow th.
Sundaram MuthootFin Source: Fitch Ratings Some sectors (eg HFCs) have higher leverage, w hile on average leverage by key issuers has not risen incrementally except for the w holesale sector.
Non-Bank Financial Institutions 3 Non-Bank Financial Institutions
Strong Profitability to Cover Credit Cost PPOP to assets (5 yr avg.) Credit cost to assets (5 yr avg.) Robust Profitability Buffer; Satisfactory (%) Consumer lenders Asset financiers Wholesale lenders Housing finance cos Asset Quality but Pressures Emerging 8 7.2 7.2 7 6.7 6.2 Leading NBFCs have maintained strong profitability 6 5.3 5.3 5.3 4.7 4.8 4.6 through the cycle, supported by w ide margins providing 5 3.8 3.7 strong buffers for credit losses. Grow th and margins in 4 2.8 3.1 3.1 2.6 2.8 2.7 2.6 2.5 3 2.4 2.1 general are less affected by competition, except for asset 1.4 1.6 1.3 2 1.2 0.9 classes w here there is meaningful direct competition from 0.5 0.4 0.4 0.6 0.3 1 0.2 0.2 banks – such as new vehicles loans, metro and Tier 1 0
housing loans, and large secured business loans (i.e.
IBHL
LTFH
ABFL
STFC
Chola DHFL
SCUF HDFC
BajFin LAP).
LICHF
MMFS
TCFSL
Magma
PNBHF
Hinduja Sundaram MuthootFin Most large NBFIs have been able to w ithstand the tw in Source: Fitch Ratings challenges of demonetisation of currency and introduction
of a goods and services tax system w hich affected the Asset Quality repayment capacity of borrow ers for a few quarters. NBFI GNPA ratio Bank GNPA ratio Demonitisation (Nov 16) Liquidity crisis (post Sep 18) Large, retail-centric NBFIs, being c loser and niche to the (%) affected NBFC affected wholesale NBFCs collections/borrowers for a core markets, maintain an adequate collection, recovery 14 Asset-quality review few quarters conducted during 11.6 and collateral-liquidation mechanis m, resulting in low er 12 FY16 affected banks’ credit costs despite higher early delinquencies. In 9.6 9.3 10 large accounts 7.8 comparison, banks have struggled w ith stressed assets 8 6.6 6.1 5.8 originating from sectors not covered by NBFCs. 6 4.8 4.6 3.9 4.1 3.3 3.8 4 2.9 3.1 3.2 Rapid grow th means portfolios are relatively unseasoned 2 and not tested through a material economic dow nturn. 0 HFCs in particular have reported limited credit costs, but Mar 12 Mar 13 Mar 14 Mar 15 Mar16 Mar 17 Mar 18 Mar 19 on average have thinner margins to absorb losses. Source: Fitch Ratings, RBI Rising non-performing loans have in part been driven by progressively more conservative recognitions criteria: 90 days overdue has been in place since March 2018. Sector liquidity strains are driving delinquencies higher, w ith asset-quality pressures likely to remain. In particular, HFCs have seen visible signs of asset-quality deterioration through ris ing lagged delinquencies. They experienced rapid grow th in their housing and w holesale portfolios, and have less granular exposure.
Non-Bank Financial Institutions 4 Non-Bank Financial Institutions
Maturity Gaps Liquidity Stress Pressures Funding and FY17 FY19 (%) Liquidity Profiles 25 22.9 20.2 (1yr ALM gap as % of assets) NBFCs ’ funding costs have risen due to more volatile market 20 rates and the liquidity crunch. Most NBFIs have been
15 replacing short-term debt w ith long-term, w hich has also led 10.6 to rising funding costs. 10 6.2 5.0 5 Construction and housing finance companies have stretched 1.3 0.2 asset-liability profiles due to long tenor assets and high 0 -0.6 reliance on customer pre-pay ments and refinancing to repay -5 debt. Follow ing the IL&FS event, NBFCs w ith larger asset- Consumer finance companies Asset financiers Wholesale financiers Housing finance companies Note: 1yr ALM gap = assets of 1yr duration- liabilities maturing in 1yr liability gaps – mainly housing finance and certain w holesale Source: Fitch Ratings NBFCs – are seeing more challenges in refinancing. Indian NBFCs are mostly w holesale funded, although certain NBFIs may take deposits, but these are a s mall part of Volatile Market Rates Diversified Funding Mix (End- March 2019) funding. Many NBFCs w ith long asset tenors increased their SBI MCLR SBI base rate 5-year AAA yield ( % ) Bank Securitization NCD CP Deposits Others reliance on commercial paper and other short-term debt to (%) 100 gain from the low -interest-rate environment over the last few 10 SBI Base rate 80 years, w idening the funding gap and raising refinancing risk. 9 60 A funding profile that is reliant on short-term sources and is 8 5-year AAA yield SBI MCLR 40 concentrated w ith higher refinanc ing risks w ould w eigh on Rise in borrowing costs credit profiles. The inability to reduce over-reliance on short- pressurized NIM 20 7 Low yield regime term funding sources could expose issuers in the current pushed 0
6 bond/CP sale uncertain environment.
LTFH
STFC
Chola
SCUF
BajFin
MMFS Magma
Hinduja More granular retail lenders benefit from short-tenor lending
Muthoot
Oct15 Oct16 Oct17 Oct18
Apr17 Apr15 Apr16 Apr18 Apr19
Jun15 Jun16 Jan17 Jun17 Jun18 Jun19
Feb16 Feb18 Feb19
Dec15 Nov16 Dec17 Dec18
Aug18 Aug15 Aug16 Aug17 Aug19 Sundaram Source: Fitch Ratings; Note: Check pattern indicates reliance on bank funding products backed by diversified financing, w hile asset Source: Fitch Ratings financiers can also tap securitisation. Indian NBFCs typically have low er unsecured borrow ings than their global peers due to regulatory insistence on security for most instruments.
More recently large NBFCs have increased their bank funding, benefitting from various government initiatives to support sector funding needs to alleviate system liquidity pressures, but at the same time increasing the potential for contagion risks for the banking system.
Non-Bank Financial Institutions 5 Non-Bank Financial Institutions
NBFC Business Profile – Snapshot of Key Players
In operations Founding Key person Financial Lending since Listed shareholder-backed riskb reporting entities Key lending segments Aditya Birla Finance Ltd (ABFL) 2009 No Yes Low Half Yearly Multiple Wholesale loans including corporate-funder financing, corporate loans, construction finance, supply chain financing, project finance Bajaj Finance Ltd (BajFin) 1987 Yes Yes Low Quarterly Multiple Consumer durable, personal loan, 2-wheeler, SME business loan (loans against property), home loans, rural loans, commercial loans Cholamandalam Investment and Finance 1978 Yes Yes Low Quarterly Multiple Vehicle finance including commercial vehicles, passenger auto, 3- Company Ltd (Chola) wheelers, tractor loans, used vehicles, and business loans to SMEs Dewan Housing Finance Ltd (Dewan)a 1984 Yes Yes Relevant Quarterly Single Home loans, wholesale real estate financing ECL Finance Ltd (ECL) 2005 No Yes Low Half Yearly Multiple Corporate loans, corporate-funder financing, Home loans, SME loans, agri loans Hero Fincorp Ltd (HeroFin) 1991 No Yes Low Half Yearly Multiple 2-wheelers, corporate loans, SME loans, inventory funding Hinduja Leyland Finance Ltd (Hinduja) 2008 No Yes Low Half Yearly Multiple Vehicle finance (mainly commercial), construction equipment loans, and business loans to SMEs Housing Development Finance Corp.Ltd. 1977 Yes No Low Quarterly Multiple Home loans, wholesale real estate financing (HDFC) India Infoline Finance Ltd (IIFL) 2006 No Yes Low Quarterly Multiple Home loans, secured business loans, construction loans, gold loans, microfinance loans Indiabulls Housing Finance Ltd (IBHL) 2000 Yes Yes Relevant Quarterly Multiple Home loans, wholesale real estate financing L&T Finance Holdings Ltd (LTFH) 2008 Yes Yes Low Quarterly Multiple Wholesale loans such as infrastructure, corporate and construction loans; retail loans such as tractors, 2-wheelers, microfinance, housing loans, and SME business loans LIC Housing Finance Ltd (LICHF) 1989 Yes No Low Quarterly Single Home loans, wholesale real estate financing Magma Fincorp Ltd (Magma) 1988 Yes Yes Low Quarterly Multiple Vehicle finance, housing loans, and business loans to SMEs Mahindra and Mahindra Financial Services 1991 Yes Yes Low Quarterly Multiple Vehicle finance (passenger auto, farm tractors, pick-up trucks), rural Ltd (MMFS) housing loans, SME business loans Muthoot Finance Ltd (MuthootFin) 1939 Yes Yes Low Quarterly Multiple Gold loans Piramal Capital and Housing Finance Ltd 2005 No Yes Relevant Half Yearly Multiple Wholesale real estate financing (Piramal) PNB Housing Finance Ltd (PNBHF) 1988 Yes No Low Quarterly Single Home loans, wholesale real estate financing Shriram City Union Finance Ltd (SCUF) 1986 Yes No Low Quarterly Multiple 2-wheelers, personal loans, gold loans, small business loans to individuals Shriram Transport Finance Company Ltd 1979 Yes No Low Quarterly Single Used commercial vehicles (STFC) Sundaram Finance Ltd (Sundaram) 1954 Yes No Low Quarterly Single Vehicle finance (commercial, passenger auto), used-vehicle Tata Capital Financial Services Ltd (TCFSL) 2007 No Yes Low Half Yearly Multiple Wholesale loans including supply chain financing, corporate loans, real estate lending, construction equipment, SME, personal loans, used-car financing, commercial vehicles a Dewan def aulted on debt repayment in 2019 b Key person risk considers likelihood of business disruption with loss of key individual managing the company Source: Fitch Ratings
Non-Bank Financial Institutions 6 Non-Bank Financial Institutions
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CO DE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU- REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Copyright © 2019 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. I n issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s rating s and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the mar ket in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherentl y forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no indi vidual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The indi viduals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to var y from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, [Country], Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.
Non-Bank Financial Institutions 7