Bajaj Finance Q3 Results Review: Higher Credit Costs Weigh On Earnings Outlook

A deterioration in Bajaj Finance Ltd.'s asset quality due to higher delinquencies in business-to-consumer loans is likely to weigh on net profit going forward, according to analysts.

Credit costs in the third quarter were elevated due to higher rural B2C delinquencies and lower collection efficiencies in the urban B2C segment, according to Motilal Oswal Financial Services Ltd.

"Management guided for gross credit costs of 1.75%-1.85%. We model net credit costs of 165bp/155bp/155bp in FY24E/FY25E/FY26E," it said in a note.

The company's standalone net profit rose 21% year-on-year to Rs 3,177.4 crore for the quarter ended December, according to an exchange filing on Monday. Analysts polled by Bloomberg estimated a standalone net profit of Rs 3,576 crore.

Loan loss and provisions grew 54% year-on-year to Rs 1,248 crore in the quarter under review. Citigroup has lowered its earnings forecast by 1-3% for FY24–FY26 on account of higher credit costs.

"Despite 35% YoY and 7% QoQ AUM growth and contained opex/assets at 3.3%, Bajaj Finance missed earnings expectations a tad," Citigroup said.

The momentum in customer acquisitions and new loans is likely to get stronger going ahead, with a push in digital offerings, Motilal Oswal said. Bajaj Finance's net interest income rose 30% in Q3 to Rs 6,973 crore, compared with the same period last year.

The company booked 9.86 million new loans and witnessed the highest-ever new customer addition of 3.85 million in Q3.

Here is what brokerages said about Bajaj Finance's Q3 results.

• Maintains 'buy' rating with target price reduced to Rs 8,975 from Rs 9,025 earlier.

• Net interest margin dipped 11 basis points quarter-on-quarter, owing to rising cost of funds, resulting in 20-30 bps rise in lending rates across all products.

• Asset quality moderated QoQ due to continued stress in rural business-to-consumer and lower construction equipment loans in urban B2C.

• To strengthen the upper management, three COOs have been appointed.

• Reiterates 'buy' with a target price of Rs 8,500 apiece. This is 18% up from current market price.

• Key focus on the impact on B2C businesses, both from a growth and credit costs perspective.

• Operating leverage driven by economies of scale and relatively lower investments on the technology side will drive a moderation in the opex-to-NII ratio to 32% in FY25 and FY26.

• Capital adequacy ratio took a hit of 290 bps due to the RBI's move to increase risk weights on consumer credit exposure.

• Expects net profit CAGR of 27% over FY23-FY26.

• Sees return on assets of 4.6% and return on earnings at 23% in FY26.

• Maintains 'buy' rating with a price target of Rs 9,470, indicating a 34% upside.

• Stage-3 loans rose to 0.95% of AUM, up 12% QoQ from personal and small and medium enterprises loans.

• Compliance on EMI-Cards is still work-in-progress.

• Tier-1 CAR is at 23% as 290 bps lost to RBI's tighter norms.

• Key risks are a slowdown in growth, higher-than-expected NIM compression, or asset quality deterioration.

• Upside can arise from stronger than expected growth in consumer durable and rural financing business.

• Further improvement in operating efficiencies and reduction in cost ratios will help.