Bajaj Finance bracing for tougher times ahead

In the wake of money becoming expensive, lender turning to depositors for funds

The major takeaway from Bajaj Finance’s September quarter (Q2) results is a spike in deposits.

At ~110 billion, deposits surged by 41 per cent yearon-year in Q2, taking its share in overall liabilities to 15 per cent, from 10 per cent in the year-ago period.

“By 2020, we plan to increase the share of deposits to 20-25 per cent,” says Rajeev Jain, Managing Director of Bajaj Finance.

While a top-rated entity like Bajaj Finance may not be a victim of liquidity crunch, it is unlikely to remain unaffected, in an increasing interest rate scenario. Deposits are typically cheaper and stickier.

The focus on deposits shows how other sources of funds are becoming costlier.

For now, Bajaj Finance maintained its overall cost of funds at 8.2 per cent in Q2, close to FY18 levels, but is bracing for an elevation to 9 per cent in the coming quarters.

Therefore, keeping a close watch on other parameters such as asset quality and asset-liability management (ALM) becomes critical.

Some miss on these parameters led to a choppy Street reaction after the Q2 results, as the stock fell 1.6 per cent. While on a gross basis, non-performing assets (NPA) ratio increased by 10 basis points sequentially to 1.49 per cent (mainly on account of the rural book), the net NPA ratio inched up to 0.53 per cent, from 0.44 per cent in previous quarter. It also has a ~2.25 billion exposure to the beleaguered IL&FS.

Swinging between 70 per cent and 75 per cent in the past four quarters, provision coverage, too, fell sequentially from 69 per cent to 65 per cent in Q2. In addition, slippages of ~4.8 billion in Q2 — the highest in five quarters — didn’t go down well with investors. As for ALM, while long-tenure loans (those maturing after three years) face mismatch, shorter-duration loans fare well. This may hurt profitability if Bajaj Finance is not able to keep a tab on cost of funds.

While the headline AUM (assets under management) growth remained strong at 38 per cent year-on-year, a granular reading indicates probable growth moderation for its mainstay lending pockets — consumer wholesale and retail finance.

These grew by 5-7 per cent sequentially, compared to earlier growth rates of over 10 per cent.

Nonetheless, having broad-based its offering in the rural, small businesses and housing portfolios is aiding strong overall growth. All these suggest that the coming quarters will be crucial for Bajaj Finance to defend its lofty stock valuations of 5.1x the book.