Shares of gold financing companies were up on the NSE on Monday, with Muthoot Finance Ltd. and Manappuram Finance Ltd. getting strong buying interest. The rally came as domestic and international gold prices were rising, and this had an optimistic effect on gold loan companies whose lending businesses are backed by gold collateral.
Muthoot Finance shares rose more than 5% to 3,177.80, while the broader Nifty was down. The move indicates that investors are becoming more interested in gold-linked financial companies (the precious metal remains at record levels).
Gold prices increase on MCX
Gold prices were up on Monday on the MCX, tracking global bullion markets.
The October gold futures contract rose 0.56 percent to 1,63,346 per 10 grams in early afternoon trading. The gold market has been strong for a week now, with the precious metal not only up by Rs 908, with the currency markets on the rise but also based on US economic data and expectations of monetary policy.
International gold prices also advanced. Spot gold rose about 0.73 percent to $4,636.82 per ounce as it rose to its highest level since May 15 earlier in the afternoon. US gold futures rose around 0.27 percent to $4,693.11 per ounce.
Gold had already gained more than 5 percent during the previous week alone, which added to the positive sentiment about the metal and gold-linked businesses.
How do higher gold prices help gold financiers?
Gold financing companies typically lend against gold pledged by customers. As the value of the pledged gold increases, the value of the underlying collateral also increases.
This can provide lenders with more security for the loans they have made. Higher gold prices can allow eligible borrowers to raise more money against the same amount of gold, according to loan-to-value limits and regulatory requirements.
For companies such as Muthoot Finance and Manappuram Finance, this could support gold-loan disbursements and assets under management (AUM) if customer demand remains strong.
But the benefit is not automatic. Loan growth, interest yields, borrowing costs, operating expenses, and asset quality will determine how much higher gold prices will help to generate profits.
The higher collateral can support asset quality
Another benefit for gold financiers is an increase in collateral value.
If gold prices remain high, lenders could have a greater cushion against potential credit losses. Higher collateral values can, in theory, help protect lenders when a borrower defaults, and the impact on collateral values will be influenced by the loan-to-value ratio, recovery processes, and gold prices.
I mean, while high gold prices can enhance the collateral position of lenders, investors still have to watch asset quality and collection trends.
Muthoot Finance and Manappuram performance
The two gold financing stocks have delivered different performances in the past year.
Muthoot Finance has been under pressure for some time now, down 16.6% year-to-date and 18.57% in the past 12 months despite the recent rally.
Manappuram Finance has done better. Its shares have gained about 18.6% year-to-date, and about 37.2% in the last year.
The contrasting performance suggests investors are not only pricing the companies on gold prices but are also valuing the companies based on their individual growth prospects and asset quality, funding costs, and profit.
Gold Price Outlook is a key one
Gold financiers will be closely involved in the bullion market outlook. Investors are waiting for U.S. inflation data and comments from Fed Chair Kevin Warsh as to what the future will be in terms of interest rates and US dollar.
A weaker dollar and expectations of easier monetary policy can support gold prices, while changes in global economic conditions can affect investor demand for the safe-haven asset.
For Indian gold financiers, continued strong gold prices could be a good source of support in terms of collateral values and loan growth.
But the sustainability of the stocks’ rally will ultimately depend on whether those positive gold-price trends translate into stronger disbursements, AUM growth, and earnings without compromising asset quality.
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