Gold loan segment of NBFCs set to glitter: BofA Securities

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When comes it to borrowing, most Indian households prefer taking a gold loan since it is a quick way to raise money and is considered an attractive option due to its inherently lower risk compared to other forms of loans. Citing this Bank of America (BofA) Securities has initiated coverage on the sector and believes that gold loans offered by Non-banking financial companies (NBFC) are set to glitter.

Gold loans to surge

According to BofA Securities organized gold loan industry will deliver an average growth rate of around 15% per annum over the next 4-5 years driven by market share gains from informal lenders – who still form 60-65% of the market. Better acceptability among customers, particularly in North and East India and potential for a sustained increase in ticket sizes. The penetration of gold loans is still low in India at 5-6% of the household gold stock. Aggressive promotion by the leading banks and smart ad campaigns by the leading gold NBFCs, highlighting the advantages of gold loans, would expand the market.

Sector picks

FY21 saw some banks grow their gold loan AUMs (asset under management) by over 50% YoY (year on year), which has concerned some investors about the implied market share losses for specialized gold NBFCs. The global brokerage firm believes concern overblown and see Muthoot and Manappuram delivering 17% and 14% CAGR (compounded annual growth rate) in their gold loan AUMs led by their extensive branch networks, eclipsed only by a few banks. Focus on under-banked customers, who value quick loan approval over the price of the loan and consumer trust gained over decades.

Muthoot Finance | Rating: Buy | Price target: Rs 1,890

India’s largest gold loans NBFC, Muthoot Finance is well placed to benefit from the rising demand for gold loans as underbanked borrowers see it as an easy and relatively cheap source of personal and business loans, said BofA Securities. Muthoot’s valuation has scope to further re-rate as it continues to deliver industry-leading growth, added the report.

Manappuram Finance | Rating: Buy | Price target: Rs 225

Looking past near-term stress in Manappuram Finance microfinance portfolio (22% share) the brokerage house sees a business well-placed to deliver 20% EPS (earnings per share) growth and 24% RoE (Return on Equity) through FY24E. Manappuram’s gold loan book is likely to resume steady growth from Q2 of FY22 and credit costs are likely to peak in the first half of FY22.

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