As growth declines, stress increases for Bajaj Finance

The non-banking financier has turned cautious on the lifestyle segment in Q2

When a usually confident and optimistic head of a large lender is uncertain of the near-term demand trajectory, it signals that the underlying economic stress is possibly deeper than perceived.

The lender here is Bajaj Finance, headed by Rajeev Jain.

“We would be able to make a comment on the festive season only by the end of the December quarter,” he said.

What this implies is that while Bajaj Finance may have put up a solid showing in terms of the overall numbers, there’s not much to suggest that the trends are equally robust. This may partly be the reason for the Bajaj Finance stock correcting by 2.6 per cent after its September quarter (Q2) results were out on Tuesday.

This doesn’t mean that investors have no positive takeaways from the Q2 numbers. For one, despite the challenging environment, the lender’s ability to grow its net interest income (difference between interest earned and interest expended) by 48 per cent and profit before tax by 41 per cent despite a reasonable jump in provisioning cost is commendable.

Also in an environment of escalating cost of funds, Bajaj Finance was able to keep a check on this parameter and tap cheap funds globally and domestically, which helped the lender reduce its blended cost of funds by 11 basis points (bps) to 8.39 per cent sequentially.

At a time where raising deposits is tough even for banks, Bajaj Finance increased the share of deposits to the overall funding mix to 18 per cent in Q2, a jump of 300 bps year-on-year despite last year’s high base. Even sequentially, this figure has been maintained.

But the part that needs focus and would weigh on Bajaj Finance’s stock in the near term is the asset quality challenges that reflected in Q2.

For instance, the lender has turned cautious on the lifestyle portfolio in Q2, after becoming watchful on digital products a quarter ago. Loan against property remained an area of stress in Q2 as well. Also, delinquencies or dues over the past 30 days seem to be on the rise across segments, and particularly so for rural business, consumer loans, and personal cross-sell loans (those sold to existing clients).

Even if these levels aren’t alarming, they indicate that the repayment ability of Bajaj Finance’s customers could be under some stress. Given that in Q2 about 70 per cent of loan growth was contributed by those extended to existing customers, this factor will be closely watched.

A reason for asset quality numbers not looking as good as in the past is Q2’s relatively weak loan growth. In Q2, new loans grew 23 per cent year-on-year, while overall assets under management grew 38 per cent year-on-year. The gross non-performing assets ratio rose by 12 bps year-on-year in Q2 to 1.61 per cent in a year, though flat on a sequential basis. Stress was particularly visible in auto and rural business loans.

The company has guided for a credit cost of 180 bps in FY20 and Jain says the current environment feels similar to the period of demonetisation, when Bajaj Finance’s credit cost was 170-180 bps in FY17.

“While we aren’t too perturbed about the cautious management guidance, it is time to trim expectations from the stock,” says an analyst who has a buy rating on Bajaj Finance for five years in a row. Valuations at 7.5x the FY21 estimated book are expensive in the context of growth challenges that stare at the lender.