Gross NPLs declined to 1.8% from 2.8% in Q3 as BAF wrote off bad loans to the tune of c1.3% in Q4. Notably, the Stage 3 coverage ratio remained stable q-o-q at c58%. Restructured loans constituted c1.1% of loans classified as Stage 2, and BAF provided c20% towards such loans, higher than the regulatory requirement. Net NPLs plus restructured loans made up c1.8% of loans against which the company holds Stage 1 and 2 provisions (including overlay provisions of c Rs 8.4 bn) of similar quantum. With this, the balance sheet quality returned to pre-COVID-19 levels and the company should be in a better position to weather near-term uncertainties amid the second pandemic wave.
All businesses (ex-auto) back in growth mode: Consolidated AUM grew 7% q-o-q (+4% y-o-y), with all the businesses returning to growth mode except its two-wheeler financing business. This segment is the worst hit by the pandemic given the kind of customer segment to which it caters and, hence, management has consciously decided to grow slowly in this segment. Near-term growth momentum is likely to be impacted by pandemic-led restrictions in larger states, although the new loan origination run rates are relatively better than the same period last year. Management remained confident of the digital business transformation initiatives driving new loan origination in H2FY22.
Opex remains elevated, led by growth: Total opex grew 16% q-o-q, driven by a steep 13% q-o-q increase in employee costs. Some of the increase in opex can also be attributed to a higher recovery of commissions paid, which should moderate going forward, as asset quality stabilises.
Preferred name: We lower our FY22-23e earnings by an average 4% on lower growth and higher credit cost assumptions. We like BAF for its robust business model and strong management execution capability. After a challenging FY21, we expect BAF to return to a high growth phase from FY22e. BAF’s tech initiatives are underway, which should allow it to lend to its customers seamlessly and reduce its customer acquisition costs. Moreover, its strong capital level (25.1% Tier 1 ratio) and liquidity position should allow it to tap potential opportunities.