Banks’ Bad Loans Turn Indian Stock Pickers to Consumer Lenders

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  • Stakes in non-bank lenders raised at fastest pace since 2012
  • Mirae Asset cut holdings in state banks amid rising bad debt

Indian fund managers are warming to consumer-focused lenders such as Bajaj Finance Ltd. and SKS Microfinance Ltd. at a time when many commercial bank shares are out of fashion due to rising bad loans to corporate debtors.

The nation’s money managers raised holdings of non-bank finance companies in April to 6.31 percent of the combined $63 billion they owned in local equities, up about 0.6 percentage points from the previous month and the fastest monthly gain in more than four years, data from the market regulator show.

Indian fund managers are attracted by the rising profits and rapidly-expanding loan books of the country’s retail lenders, and are shying away from big corporate books held by banks such as state-controlled Punjab National Bank and Bank of India. Last month, Bajaj Finance and SKS reported the highest annual profit in at least five years.

“We cut our stake in state-run banks due to concerns over rising bad loans,” said Gopal Agrawal, chief investment officer at Mirae Asset Global Investments (India) Pvt, which has $469 million in assets. “We prefer private-sector lenders and non-banking financial companies due to their lower nonperforming assets. As India is under-banked, we see a great opportunity in consumer lending and micro-finance companies.” He didn’t specify which shares he had bought or sold.

April’s increase in money managers’ holdings of the non-bank finance companies beat the 0.3 percentage-point gain in their bank holdings, to 20.3 percent, the market regulator’s data showed. Fund managers that benchmark their performance against certain indexes are obliged to maintain holdings of bank shares at a particular level. The stocks account for about 22 percent of the S&P BSE Sensex.

SKS Microfinance, India’s largest micro-finance lender, gained 35 percent this year, while Bajaj Finance surged 28 percent. Manappuram Finance Ltd., which lends against gold collateral, almost doubled. India’s retail loans grew 19.7 percent in the year to April 29, compared with overall loan expansion in the banking system of 8.4 percent, according to data compiled by the central bank.

Marshall Wace Asset Management’s Amit Rajpal is backing SKS’s market value to more than triple over the next three years with its better-than-average loan growth. The Indian microfinance industry may more than double to $20 billion in that time as the government and central bank attempt to give the poor better access to formal financing, Rajpal, who manages global financial services strategy for the London-based hedge fund firm, said at a conference in Hong Kong last week.

Shrinking Margins

SKS Microfinance had a bad-loan ratio of just 0.1 percent as of March 31, while Bajaj Finance’s ratio was 0.3 percent, according to latest filings. The figures for state-owned banks reached a 16-year high of 14.3 percent in the year ended March, Finance Ministry data show.

Government-owned lenders derive less than a fifth of their lending from retail customers. Their corporate loan books are a problem as companies struggle to repay debt as profit margins narrow amid a slump in commodity prices and slowing industrial output. Profit margins for companies in the S&P BSE 500 Index have contracted to 7.37 percent, the smallest in 14 years, data compiled by Bloomberg show.

Shares of Punjab National and Bank of India lost at least 25 percent this year, as the NSE Nifty PSU Bank Index, which tracks government-controlled lenders, sank 12 percent. The two were among 15 state-run lenders that reported combined losses of $3 billion for the March quarter as provisions for bad loans surged. Private-sector lenders aren’t immune either -- ICICI Bank Ltd. warned in April that up to 10 percent of its loans could sour, while Axis Bank Ltd. had a prediction of more than 6 percent.

Meanwhile, non-bank lenders and banks with bigger retail businesses have won favor with investors. State Bank of India, which accounts for a fifth of all credit in the country, rallied 7 percent since May 27 after the company said about 2 percent of its loans were at risk of souring -- less than some analysts had expected. While SBI had a 6.5 percent bad-debt ratio at the end of March, the ratio for the retail lending that makes up more than a fifth of its loans was just 0.8 percent.

“We are focused on retail-oriented NBFCs or banks,” said Prateek Agrawal, chief investment officer at ASK Investment Managers Pvt in Mumbai, which manages about $1.1 billion. “We are there with banks who have a sizable part of their book from retail borrowers. That’s the part of the economy that continues to do well and losses are in check.”