Which NBFC Stocks Does UBS Prefer Amid Improving Credit Trends?

Synopsis: UBS has identified select NBFC stocks as preferred investment ideas amid improving credit trends. The broking highlighted strengthening asset quality in segments like commercial vehicle financing while noting persistent stress in small-ticket MSME loans. UBS prefers Shriram Finance, Cholamandalam Investment, Poonawalla Fincorp, and PNB Housing Finance, while maintaining a sell rating on Bajaj Finance.

Non-banking financial companies, or NBFCs, continue to be in focus, and investors are keeping a tab on the credit trends, asset quality, and interest rate movements in the financial space. The space is important from a credit growth perspective, and segments such as vehicles, housing, and small business loans are part of this space. Broking houses are now highlighting positive repayment trends in some segments of the lending space, though there are pockets that are under stress. In this context, some NBFCs that are relatively better are being picked out by analysts.

Improving Asset Quality Drives UBS NBFC Picks

The broker noted that the latest January credit bureau data shows an improvement in trends for several lending segments. This implies that the stress seen in parts of the credit ecosystem in recent quarters is easing. Such an improvement in repayment behaviour and delinquency trends is a welcome sign for the overall asset quality of NBFCs. With economic activity remaining resilient and credit demand continuing to increase, an improvement in credit indicators could bode well for NBFCs to sustain their growth trajectory with improved asset quality.

The broking highlighted the commercial vehicle financing segment as an area where asset quality is showing a consistent improvement trend. Such an improvement is a result of an increase in freight demand, better utilisation of vehicles, and improved cash flows for transport operators. 

However, UBS noted that small-ticket micro and small enterprise loan delinquencies remain stable but elevated. This indicates that micro and small enterprises are still under some stress. While the situation is not worsening for these enterprises, it could take a while for this segment to normalise compared to larger borrower groups.

UBS has also highlighted macro risks that may impact the NBFC segment over the short term. The broking firm stated that geopolitical risks remain high in the Middle East, which may keep bond yields high across the globe. This may, in turn, keep borrowing rates high for the Indian economy. 

Since NBFCs tend to be more rate-sensitive than banks, such high bond yields may impact their profitability as well. Hence, investors may keep a keen eye on interest rate movements while investing in NBFC stocks.

In this context, UBS has come up with its recommended investment options within the NBFC segment, which may be attractive for investors based on their growth potential and asset quality. The broking firm has recommended Shriram Finance and Cholamandalam Investment as their preferred stocks within the large-cap NBFC segment since both of them tend to be strong players within the vehicle loan segment. 

Among mid-cap NBFC stocks, UBS has recommended Poonawalla Fincorp, while PNB Housing Finance has been recommended among the housing finance segment stocks. The broking firm has also recommended a sell rating on Bajaj Finance, which may indicate limited upside for investors.

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