Muthoot Finance, Manappuram Finance Shares Rise As Gold Rally Boosts Gold Loan Stocks; Here's Why
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A weaker dollar and falling US bond yields have driven gold higher, and that rally is now spilling over into gold-backed lenders whose loan books gain a bigger collateral cushion.
Shares of gold financiers Muthoot Finance and Manappuram Finance were in demand on Thursday as gold prices continued to trade higher, bringing renewed investor interest to companies that lend against the precious metal.
Muthoot Finance shares rose as much as 4.83% to Rs 2,997.30, while Manappuram Finance gained up to 3.29% to Rs 351.55 during intraday trading. At 12:50 PM, Muthoot Finance was trading 3.70% higher at Rs 2,964.70, while Manappuram Finance was up 2.24% at Rs 347.6.
The gains came as MCX gold futures continued to move higher. Gold was trading 0.26% up at Rs 1,58,403 per 10 grams after touching an intraday high of Rs 1,58,750. The contract's all-time high stands at Rs 1,84,650.
Gold has been supported by a weaker US dollar and a sharp fall in US bond yields, which have increased demand for bullion. The latest rise in gold prices has also turned the spotlight on gold loan companies, for which the value of the metal pledged by customers is directly linked to the collateral backing their loan books.
Why Gold Financiers Benefit When Prices Rise
A rise in gold prices increases the value of jewellery pledged by borrowers. For lenders, this provides a larger collateral cushion against outstanding loans and can reduce the risk of a shortfall if the pledged gold needs to be sold.
It can also increase the amount a customer can potentially borrow against the same quantity of gold, subject to applicable loan-to-value limits. This can support fresh disbursements and help lenders grow their gold loan assets under management (AUM) without requiring a corresponding increase in the quantity of gold pledged.
Higher gold prices can therefore support the operating environment for companies such as Muthoot Finance and Manappuram Finance, particularly when demand for gold-backed credit remains strong.
The benefit, however, is not automatic. Loan growth, interest rates charged to borrowers, borrowing costs, competition, collection efficiency and asset quality will continue to determine how much of the favourable collateral environment translates into earnings.
For Muthoot Finance and Manappuram Finance, the impact of higher gold prices will therefore depend on how the bullion rally translates into loan demand and AUM growth. Interest rates charged on loans, funding costs, operating expenses, competition and asset quality will continue to influence the eventual impact on earnings.
The backdrop for gold has also remained supportive. The dollar index fell sharply on Wednesday after the US Treasury announced plans to increase the size of its liquidity support buyback operations for longer-dated bonds. At the same time, US Treasury yields declined, making non-yielding assets such as gold relatively more attractive.
That move triggered a sharp rally in precious metals, with gold and silver both posting strong gains in the previous session. The continued strength in bullion prices has now spilled over into gold-linked stocks, with investors watching whether elevated gold prices can sustain growth in gold-backed lending.
For Muthoot Finance and Manappuram Finance, the key factor to watch going forward will be whether the higher value of pledged gold translates into stronger customer borrowing, higher gold loan AUM and sustained growth in the business.
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This article is for informational purposes only and should not be considered investment advice from Kotak Neo. For compliance T&C and disclaimers, Visit www.kotakneo.com/disclaimer
Rochelle Britto has spent 8+ years decoding India's markets, businesses, and consumer economy, reporting for ET Prime and Times Internet along the way, covering the stories behind the numbers.
A Mumbai native and perpetual planner of the next holiday, she stays far, far away from the eternal question, “Where are we going next?” When she's not chasing headlines, she's chasing new cultures, open roads, and a bit of quiet in nature.
