Best Private Bank & NBFC Stocks To Buy Now: Research Report By Nirmal Bang

Retail Therapy: Time To Reboot

We believe that the outlook on a long-term secular uptick in small-ticket (‘retail’) lending in India is still significantly favourable as: (1) Despite the retail lending ‘boom’ that ensued in recent years, India remains an economy that is grossly underpenetrated on the retail credit side from an over-arching ‘30,000-feet’ view perspective. (2) Specific small-ticket loan segments are egregiously under-penetrated. (3) There is significant government support in addressing small-ticket credit supply gap. At the same time, we stress that our list of beneficiaries from this trend (which we have enumerated below) are driven primarily by idiosyncratic stock-specific factors first and then have a secondary macro overlaying tailwind to benefit from.

Despite retail lending ‘boom’, India remains grossly under-penetrated on the retail credit side:

PFCE (Private Final Consumption Expenditure), which is the portion of the economy relevant from a retail credit perspective, has always been a major contributor to India’s GDP and its share has inched up from 56.2% in FY12 to 58.9% in FY18E. Importantly, specified retail credit as a proportion of relevant portion of GDP (PFCE) stands at 28.8% as of FY18E whereas specified wholesale credit as a proportion of relevant portion of GDP (GDP less PFCE) stands at 64.1%, indicating significantly lower generic leverage for the former.

Specific loan segments including small-ticket housing, micro and small enterprise lending, microfinance and gold loans are egregiously under-penetrated:

According to the MoHUPA, 95% of urban housing shortfall in India falls under EWS/LIG sections. Similarly, the NSSO Survey states that 96% of micro and small enterprises in India do not have access to formal lending. Further, 75% of rural Indian households have their highest earning member making less than Rs5,000 a month, making loans to them potential ‘qualifying assets’ from a microfinance perspective. Also, the potential addressable size of the gold loan market is derived from as much as ~20,000tn of Indian household gold holdings, of which only ~10% is being used as collateral and, further, of this, the share of formal lenders is just one-fourth.

Central government is whole-heartedly focused on addressing credit supply gap in small-ticket lending:

The Pradhan Mantri Awas Yojna aims to address low house ownership in India lower down the income pyramid by way of targeted credit subsidy for EWS/LIG and MIG consumers. Similarly, the Pradhan Mantri Mudra Yojna aims to create employment lower down the pyramid by way of supporting credit supply to micro and small enterprises via a refinancing reservoir. In fact, the government is hugely supportive of the MSME segment across the board (not just micro enterprises) and a raft of measures augment the opportunity size of formal lending to the MSME segment. Also, importantly, the Indian government remains focused on social and rural spending, regardless of political affiliation, a trend that may accelerate going into an election year.

Our list of potential beneficiaries are driven primarily by idiosyncratic stock-specific factors and aided further by the macro overlaying tailwind:

Our list of beneficiaries include highly retailised mid-cap banks (DCB Bank, City Union Bank); mid-cap banks that are quoting at unjustified distressed valuations (South Indian Bank, Karnataka Bank) and a mid-cap bank with unconstrained DNA (RBL Bank), all three of which are re-orienting their loan book towards retail; a mid-cap bank with a balanced strategy (Federal Bank); housing finance companies with inherent small-ticket lending strength (CanFin Homes, Repco Home Finance) and unconstrained strategy (PNB Housing Finance); a small finance bank to benefit from business model transformation (Ujjivan Financial Services); gold loan NBFCs emerging from back-to-back crises (Manappuram Finance, Muthoot Finance) and an MSME-focused NBFC that is engaging in a highly synergistic merger with IDFC Bank (Capital First). We initiate coverage on all of them with a Buy Rating, barring Capital First, on which we have assigned an Accumulate rating.