Brief India: Why Did Bank Credit to NBFCs Spurt in September, and Shrink in January? and more

In this briefing:

1. Why Did Bank Credit to NBFCs Spurt in September, and Shrink in January?
2. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral
3. Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom
4. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

1. Why Did Bank Credit to NBFCs Spurt in September, and Shrink in January?

For the beleaguered non-bank finance company (NBFC) sector, banks are the single largest component of external funding. This source peaked at the end of September 2018, in the aftermath of the default of IL&FS, a private unlisted infrastructure developer and financer.  However, in the beginning of the last quarter of the financial year ended March 31, 2019 (4QFY2019), when bank credit in the economy normally peaks, bank credit to NBFCs (as on January 18, 2019) has declined as compared with the previous month. The sharp spurt in bank credit at end-September probably indicates that NBFCs utilised their sanctioned limits with the banks, and top-rated NBFCs took on excessive bank loans to tide over their asset-liability mis-matches in that period. Subsequently, by early January 2019, banks may not have renewed or rolled over the NBFC bank limits, which led to a drawing down of bank credit. It therefore appears that bank finance will continue to remain tight for NBFCs in the last quarter of FY2019, as they sell their assets to banks and restrict asset growth in order to remain liquid.

2. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral

Following three years of share price declines, Chris Hoare has started to moderate his negative view on Bharti Infratel (BHIN IN). Our thesis, that Infratel would struggle as the market consolidated to three players, has largely played out. We remain wary of the viability of Vodafone Idea (IDEA IN) at current tariff levels but the ongoing capital raising at IDEA puts off the day of reckoning, while IDEA’s exit penalties (as they consolidate with Vodafone) are being paid quarterly which will flatter revenues/cash flow. We think earnings forecasts have probably bottomed for the time being and raise our recommendation to Neutral and upgrade our price target to INR270 (from INR220).

3. Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom

Crude has been gradually reconnecting with its supply-demand fundamentals, and the impact of highly disciplined OPEC cuts just two months into the group’s production restraint deal is becoming evident in relatively stable prices. Through much of last week, crude prices firmed and stood their ground even as global stock markets were skidding.

However, oil is not completely out of the shadows of the global economic sentiment. Crude prices were whiplashed last Friday along with the equity markets as a fresh wave of gloom and doom from the European Central Bank’s downward revision of eurozone growth projections rattled investors. Earlier in the week, China set off fresh alarm bells, by officially revising down its 2019 GDP growth target to 6-6.5%, while Premier Li Keqiang warned that the country’s economy faced a “tough struggle” ahead.

Nonetheless, benchmark Brent and WTI  crude futures resisted the lows plumbed during intraday trading Friday, to close marginally higher on the week. While global oil demand growth forecasts remain tentative, supply fundamentals are clearly firming. Output from 11 of OPEC’s 14 members that agreed to collectively curb output by around 812,000 b/d starting January this year almost reached 100% of the target in February.

The race to the compliance finish line was helped by Saudi Arabia, which is slashing its output way beyond its commitment. Meanwhile, the three OPEC members exempted from the latest round of production cuts — Iran, Libya and Venezuela — are also under-delivering. That amounted to OPEC-14 production plunging by around 1.7 million b/d compared with the high of last October.

OPEC will need to be careful not to over-tighten the market, as happened through the first half of last year. We believe the group will be cautious on that front, given its experience of 2018, when it was forced to make two policy U-turns in the space of six months. 

4. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message