For Finance Companies it’s a Case of Bigger the Better

Published on Daily FT on 11 April 2017

For finance companies in tough conditions, the adage “bigger the better” is key to success, according to First Capital Equities Research.

In its latest research on the sector, FC said it expects finance sector to face moderately tough conditions to operate with thinning margins and new LTV regulations leading to slower and previous but moderate credit growth.  “Despite slow economic conditions rise in NPLs are likely to be slow amidst price appreciation in vehicle prices as bulk of the lending is attached to vehicles. We believe the larger finance companies have an advantage with lower cost of funding and large conversion levels from leases to loans which improves re-pricing abilities at times of rising interest rates,” said FC Research, which is recommending “Hold” for the sector stocks.

The broking firm also said with rising interest rates and bulk of the lending attached to leases finance sector is likely to experience a dip in margins while credit growth is expected to remain moderate around 16-18% despite deceleration from 2016. New LTV regulations also likely support the slower credit in 2017E.

Despite rise interest rates and slower economic conditions FC Research expects NPL provisions of finance companies to continue to stay on the back significant price appreciations in the second hand vehicle market. Higher vehicle prices are likely to deter related borrowers from default while even if defaulted higher vehicles prices ensures finance companies of eliminating losses and recovering bad debts. “Finance companies with better rating and larger asset base tend to have a lower cost of funding while some finance companies have already converted significant portions from loans to leases enabling them to re-price part of the assets in line with interest rates.

These two conditions being satisfied enables selected finance companies specifically identified as PLC, CFIN, LFIN, COCR and LOFC to perform better in tough environment,” FC Research said. “We expect the selected companies to provide an average total return on equal weightage of c.51% during a 12-month period,” it added.