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NBFCs, including both large- and mid-cap companies as well as diversified and monoline players, are expected to report a strong first quarter of FY27. Despite global challenges such as the escalating West Asia conflict and ongoing inflation concerns that weighed on investor sentiment during much of the quarter, the sector remained operationally resilient, according to a Kotak Institutional Equities report.

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Growth Guidance and Margin Expansion

The report said, "We expect NBFCs to raise guidance on growth, which was mixed last quarter due to the overhang of the West Asia war; most diversified NBFCs are firmly above 20% loan growth; expect guidance to inch up to ~25% for the larger pack."

The sector experiences a favourable shift in earnings dynamics, primarily driven by an expansion in margins. As per the report, most non-banking financial companies (NBFCs) will report healthy net interest margin expansion of 9 to 80 basis points year-on-year (YoY), though some compression remains visible in specific players.

Profitability Drivers: Costs and Yields

A primary catalyst for this performance is the reduction in liabilities costs, as borrowing costs declined by 22 to 90 basis points YoY for most players over the past four quarters. The benefit of lower exit cost of borrowings drives the margin expansion in Q1FY27.

At the same time, asset yields present a varied landscape across the industry. Yields contracted 5 to 80 basis points YoY, but likely inched up quarter-on-quarter for most firms, except affordable housing finance companies that recently cut benchmark rates. While the incremental cost of funds rose toward the end of the year, the same softened by June 2026, aided by a rally in bond markets. Looking ahead, increases in marginal cost of funds-based lending rates by banks by 5 to 10 basis points in select buckets will weigh on margins. With comfortable liquidity, competitive intensity remains intense, which puts pressure on asset yields.

Strong disbursements and insurance fees fuel fee income growth, though impending insurance commission guidance requires close monitoring.

Segment-Specific Momentum and Outlook

The report further added that "Affordable HFCs, with encouraging incremental growth trends, will likely be more assertive about growth. Concerns of a weak monsoon and food inflation will be the only outliers."

Individual segments showed a clear revival in momentum across the board. Unsecured lending segments regain traction, while vehicle finance gains support from major automotive manufacturers reporting healthy 15 to 20 per cent volume growth across most segments alongside a stronger exit month. Gold loans held well despite process changes from new regulations and a fall in gold prices. Affordable housing finance companies, which faced a slowdown over the last two years, show early signs of improvement since the fourth quarter of the financial year 2026, with momentum expected to pick up through the financial year 2027. (ANI)