Bharat Financial says open to merger or acquistion

Bharat Financial Inclusion, which on Monday reported a net loss of ~235 crore for the quarter ending on March 31 (Q4), has confirmed the market buzz that the microfinance institution (MFI) is open to a merger or acquisition.

In a communication to stock exchanges, Bharat Financial, formerly SKS Microfinance, said, “In the changing landscape of MFI sector, the company continues to explore a range of strategic options, including merger with or acquisition of a bank or financial institution.”

For some time, there has been a strong buzz that the micro lender could merge its operations with IndusInd Bank. However, none of the two sides either confirmed or denied the news.

While the Street will closely monitor the investor call slated before market opening on Tuesday, expect the stock to be in focus. A merger, experts say, is becoming necessary, given the changing dynamics in the sector.

Having missed the bus on small finance banks (SFBs), Bharat Financial seems to have lost the opportunity to tap into lowcost deposit funds. While the current 8.8 per cent cost of borrowing is still among the best in the sector, given its 64 per cent dependence on term loans, borrowing costs can be brought down further with access to low-cost deposits. Two of its closest competitors, Equitas and Ujjivan, have converted into SFBs, which gives them access to cheaper funds.

Also, for Equitas and Ujjivan, SFB operations helped tide over the note ban crisis, as their MFI customers could tap into the SFB. Bharat Financial had no such advantage.

Merger with a bank could help Bharat Financial on both fronts. Also, with new formats such as SFBs and payments banks and even private and nationalised banks ramping up operations in semi-urban and rural areas, a strong strategic partner is important for the micro lender to stay ahead of the rest. Bharat Financial posted its weakest performance in the fourth quarter of 2016-17 since the crisis faced by MFIs in Andhra Pradesh (AP) in FY11-13.

While investors were bracing for tough quarter (Q4) results given the elevated stress hinted in an earlier investor call, provisioning of ~334.5 crore has taken them by surprise. Further, the gross non-performing assets (NPA) ratio of six per cent in Q4 and FY17 overtakes even the number of the crisis period at about 5.5 per cent. Consequently, the quarter ended with a net loss of ~235 crore.

Even on operational grounds, the Q4 performance was shaky. Net interest income fell by three per cent year-onyear to ~178 crore, though overall revenues grew 11 per cent year-on-year to ~409 crore, helped by non-interest income such as loan-processing fees and investment income. Operating costs elevated to ~145 crore (up 29.5 per cent yearon-year), while cost-to-income ratio at 59.3 per cent was the highest in recent times. Even loan disbursement marginally dipped by four per cent yearon-year to ~3,902 crore.

The only positive for now is that collection efficiency is back to 99 per cent (except for three districts of Maharashtra). Nonetheless, Ashish Damani, CFO, Bharat Financial prefers to remain cautious. “We have to see how the asset quality pans out. If the status quo remains, pain could continue,” he states.

Investors should, however, note that Bharat Financial follows a conservative policy on bad loan provisioning. It, accordingly, provided for loans due over 60 days, as against the Reserve Bank of India’s (RBI’s) requirement of over 90 days.

Bharat Financial, though, in its investor presentation states that it would have made a net profit of ~105 crore if it adhered to RBI’s directive, as provisioning would have only been ~13.2 crore. This would still have been the weakest quarterly performance in FY17.

For now, analysts feel much of the bad loan write-offs have been fully undertaken in Q4 itself. Therefore, Digant Hazare of Antique Stock Broking says with the weak performance behind, Bharat Financial should meet its FY18 target of ~19,500 crore in disbursement and ~435 crore in net profit.

The companyposted its weakest performance in the fourth quarter of 2016-17 since the crisis faced by MFIs in Andhra Pradesh in FY11-13