Non-Bank Financial Institutions
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Non-Bank Financial Institutions 0 01 India NBFC Growth Window Created by Indian Non-Bank Financial Company Watch 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 Associate Director 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 Source: Fitch Ratings ongoing constraints on bank lending capac ity and NBFC 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 showrequirement 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 Thethe impactexpectation of the crisisof 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).