What drove NBFI’s half yearly profits boost

Non-bank financial institutions (NBFI), like the commercial banks, are posting higher profits for the first half of 2021 that attracted analysts and stock investors' eyes.

10 of the 23 publicly listed NBFIs, mostly the top-tier ones, already disclosed their financial statements for the January-June period and that reveals significant year-on-year growth in net profits after tax for nine firms.

The noticeable improvement in earnings deserves some analytical breakdown, said Rehan Kabir, a senior research associate at EBL Securities.

Also, he prefers the NBFI discussions to be divided into two parts—the institutions with a good financial health and a better compliance track record belong to one group while their struggling competitors suffer for high non-performing loans (NPL) and mostly going through organizational restructuring.

"The NBFIs already disclosing their half yearly results belong to the first group," he said.

The financial sector analyst of the brokerage firm thanked three factors for the improved earnings of the NBFIs. These are better spread in interest rates, the deferral facilities by the central bank and most importantly the vibrant state of the capital market.

Better spread

First half of 2020 was a tough period for all the lenders as The Bangladesh Bank capped the deposit and lending rates for scheduled banks at 6% and 9% respectively from the beginning of April and the average cost of deposits initially did not come down in line with the lending rate, said Md Shaheen Iqbal, President of CFA Society Bangladesh.

However, the monetary easing over the last five quarters to tackle the pandemic fallout helped reduce the cost of deposits to a fair extent and a slow growth of private sector credit growth in conjunction further reduced the deposit rates to a record low level this year, added Shaheen Iqbal who is also the head of Brac Bank's Treasury and Financial Institutions Division.  

Top tier banks like his one was offering less than 4% against fixed deposits until the Bangladesh bank tagged the rate with inflation now hovering around 5.5%.  

NBFIs were not subject to compliance with the capped deposit and lending rates. But, as they have to operate in the same market, the factors impact their spread and growth, said Kyser Hamid, the managing director of Bangladesh Finance Ltd.

However, the liquid money market helped the NBFIs improve their spread this year compared to the first half of 2020.

Spread is the difference between the cost of deposits and the lending rate.

Average cost of deposits for NBFI sector dropped below 7.6% in last June, which was 230 basis points less than the June of 2020, he said citing Bangladesh Bank data.

Half yearly net interest income improved on a year-on-year basis for many of the top NBFIs, observed analyst Rehan Kabir.

The deferral facility

Deferral facility was an important factor behind the industry's profit growth, said Hamid.

"Following the last year's moratorium, clients who are financially suffering for the pandemic situation now can continue with paying half of our installments, as instructed by the Bangladesh Bank," he explained, "clients will pay the remaining half amount at the end of their loan tenure,"

Thus the deferral facility regularized some loans even if some hiccups in installment payments and that saved some provisioning expenses for lenders, he added.

According to the central bank regulations, lenders have to set aside some of their profits as provisions against their risk of loss in loans or investment portfolio.

Most of the good NBFIs ensured a fair provisioning against any shock on their loan portfolio in 2020 and that still continues, noticed Rehan Kabir.

Capital market income

Income from capital market was the sweetest part of the NBFI's improved earnings so far.

 "It's a completely upside down picture, as the stock market was at its trough in the first half of the last year and now rose to a decent height," he added.

Three capital market subsidiaries of top NBFI IDLC Finance incurred losses and reduced the consolidated profit even below what the mother company earned from lending business.

Even after a 10% decline of the lending business' net profit the brokerage, investment banking and asset management subsidiaries helped IDLC post 55% year on year growth in consolidated net profits for January-June this year. 

The picture is the same for most of the NBFIs who have capital market subsidiaries engaged in brokerage or investment banking services as DSEX, the broad-based index at the Dhaka Stock Exchange (DSE), rose to over 6,000 points at the end of June this year, from less than 4,000 points a year ago. Also market turnover has more than doubled.

The bounced back stock market helped increase NBFIs investment income, while the business of their capital market subsidiaries increased after a long period of stress, said Hamid.

Another factor improved NBFIs earnings and that is reversal of provisions against investments.

Depressed capital market took some of their profits away into provisioning in the last year due unrealized losses in stock portfolios. But as the stock prices rose and the investment losses turned into profits the previous provisions reversed to the accounts and helped boost profits for the January-June period this year, explained Kyser Hamid.

After the deferral facility  

If the Bangladesh Bank does not extend the deferral facility in the next quarter, good NBFIs will not suffer a lot as they have been provisioning against doubtful loans, feels Hamid.

Currently the NBFI sector is on a less than 10% NPL and that might grow to a double digit figure if deferral remains no more.

The good thing is, healthy firms hold the lion share of the NFBI market and as their preparation is better the sector is unlikely to face any big hit in coming days, feel both Hamid and Kabir.