Friday, March 23, 2012

>BANKING SECTOR: RBI caps LTV for gold loans - Negative for Mannapuram and Muthoot

The Reserve Bank of India (RBI) has capped the amount of loan any non banking financial company (NBFC) can lend against gold at 60% of the value (loan to value). The tier I capital adequacy ratio (CAR) has also been raised from 10% to 12% with effect from April 2014. Further, the RBI has restricted NBFCs from lending against gold coins/primary gold or bullion. These regulations will reduce the leverage and lower the net interest margins (NIM) and return on equity (ROE). This is a big negative for listed players like Muthoot Finance, Mannapuram Finance, IIFL etc (not under our coverage).

Cap on LTV @60% will impact ROEs
Since the RBI has decided to cap the loan to value (LTV) at 60% for gold loans, the leverage levels will drop and impact the ROE of the companies. Currently the LTV ratio of Mannapuram Finance and Muthoot Finance is around 70-75% including the replacement costs. The reduction in LTV would result in a drop in average yield (20-25% currently) and will impact the profits significantly. The companies (Mannapuram Finance and Muthoot Finance) have been maintaining ROEs of around 25-28% which could drop by approximately 500bps and impact the valuation multiple.

Business growth could come under pressure
Earlier the RBI had expressed concerns on rapid business growth and rising risks of gold-loan focused NBFCs. The investor’s eye sector update loan books of Mannapuram Finance and Muthoot Finance
have grown at a compounded annual growth rate (CAGR) of 198% and 70% respectively over FY2007 - 11. Therefore the new regulation will reduce the growth of the companies as competition vis a vis banks will increase while customers could also switch to money lenders offering higher LTVs.

Big negative for Mannapuram and Muthoot
The development is a big negative for listed players like Muthoot Finance and Mannapuram Finance (not under our coverage). Post the regulations the gold NBFCs would require to restructure their businesses to minimise the impact of the regulations. However, due to the probable reduction in ROEs the valuation multiple for gold financing companies is likely to shrink.

….also negative for India Infoline, SKS Microfinance
The regulations are also negative for the new entrants in the gold loans category such as India Infoline and SKS Microfinance. The regulations as of now are for NBFCs only. But if they get extended to banks then banks like South Indian Bank, which has 26% of the book in gold loans, would be negatively impacted. Compared to that, Federal Bank’s exposure to gold loans is much lower at around 6% of the book.