Nomura maintains cautious stance on NBFCs for FY25 amid asset quality concerns, but recommends ‘buy’ on 4 stocks | Stock Market News

Non-banking finance company (NBFC) stocks have been hammered by Dalal Street investors in recent weeks, following a mixed performance in the September quarter (Q2FY25). This was driven by a moderation in year-on-year disbursement growth due to a slowdown in unsecured loans (personal, credit cards, MFI) amidst asset quality concerns and regulatory actions.

As a result, several NBFCs have reduced their AUM growth guidance for FY25, adding further pressure to falling stock prices. The latest report by Japanese brokerage firm Nomura added to the uncertainty as it maintained a cautious stance on NBFCs for the rest of FY25, expecting asset quality issues to persist.

The report highlights that if asset quality worsens, there is a limited buffer to protect profitability. For the nine NBFCs under the brokerage’s coverage, it observed further gradual moderation in AUM growth YoY in 2QFY25 compared to 1QFY25.

AUM growth for the nine NBFCs stood at 20% YoY in 2QFY25 (down from 22% YoY in 2QFY24), driven by a moderation in YoY disbursement growth, which was 10% in 2QFY25 (compared to 18% in 1QFY25).

According to Nomura, growth moderation was driven by new vehicles, gold loans, and unsecured loans, including personal loans, credit cards, and microfinance loans. The brokerage expects this trend of disbursement growth moderation to continue, with a 12% YoY growth in FY25F, down from 19%, 38%, and 38% in FY24, FY23, and FY22, respectively.

Nomura noted that the healthy AUM growth seen in FY23/24 is now under pressure in FY25F and expects this to persist due to factors like lower disbursement growth in FY24/1H25, a potential slowdown in unsecured loans and moderated volume and ASP growth, particularly in new vehicles.

However, the brokerage is optimistic about the growth momentum in the SME, LAP, and used vehicle segments.

No respite on CoF

With expectations for imminent rate cuts waning, the brokerage does not expect any relief on the cost of funds for NBFCs. Going forward, it stated that the cost of funds will remain elevated, at least in 2H25F, driven by factors such as declining growth in bank loans to NBFCs, forcing them to diversify into more expensive borrowing sources; rising MCLR for banks; a spike in the spreads of NBFC yields over G-Sec yields in recent months and the repricing of older bond borrowings at higher rates.

Separately, the regulator has been cautioning NBFCs about the usurious rates they charge, especially on unsecured loans (personal loans/MFI loans), which, along with yield pressure in the secured segment due to higher competition, can negatively impact yields, it noted. 

“Furthermore, in case of any repo rate cut in 4Q25F, it would be a positive for CoF/NIMs of NBFCs only in FY26F. Any change in the timeline for the repo rate cut would have implications, in our view,” said Nomura.

The brokerage expects credit costs in FY25F to be higher than in FY24, driven by higher delinquencies in unsecured personal loans, credit cards, and microfinance segments; and ECL/EAD, which have decreased for most players in recent years from the highs during COVID and are now at or below pre-COVID levels.

“Hence, there is limited cushion in terms of the impact on P&L if asset quality deteriorates,” it said.

Nomura’s top NBFC stock picks

Nomura maintains Shriram Finance (SHFL) as its top pick in the NBFC sector, assigning a ‘buy’ rating with a target price of ₹3,800 per share. The brokerage also has ‘buy’ ratings on Aadhar Housing Finance, LIC Housing Finance and Five Star Business Finance, with target prices of ₹560, ₹735 and ₹870, respectively.

Meanwhile, it remains negative on certain NBFCs, including on SBI Cards, for which it has a ‘reduce’ rating with a target price of ₹625. Similarly, M&M Finance (MMFS) and CreditAccess Grameen (CREDAG) also carry ‘reduce’ ratings, with target prices of ₹265 and ₹850, respectively.

For Bajaj Finance (BAF) and Cholamandalam Investment and Finance (CIFC), Nomura maintains a ‘neutral’ rating, setting target prices of ₹7,250 and ₹1,300, respectively.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.