Operationally better than expected performance
* Core PPOP beat of 7% on our estimates, solely driven by restrained opex. Absolute cost being flat qoq displays modularity of the business.
* While fee/comm. expense grew 50% qoq on higher disbursements, cost saving was achieved in employee and other opex (both down 5‐10% qoq).
* NII was 2% lower than expectation and represented modest 4% yoy growth; understandably so, due to sharp deceleration in AUM growth and built‐up of surplus liquidity (at 16‐17% of BS). Also, there was Rs1.4bn reversal of the capitalized interest (Rs2.2bn in Q1). NII growth would have been 8% after adding this.
* Consol. AUM growth was 1% yoy, dragged by substantial decline in the short‐cycle consumer finance portfolios. Mortgage book grew by 14% yoy and SME loans were flat yoy.
* Provisioning was higher than expected at Rs17bn (estimate Rs15bn), but in line with full‐year guidance of Rs64‐66bn. In Q2 FY21, further covid contingency provisions of Rs13.7bn were created on Stage 1 & 2 assets (cover increased to 3.7%).
* Gross NPA and Net NPA as of 30 September 2020 stood at 1.03% and 0.37% respectively and PCR was 64%. If the Company had classified borrower accounts as NPA after 31 August 2020, the Gross NPA and Net NPA ratio would have been 1.34% and 0.56% respectively.
* Profit miss of 5% mainly came from higher provisioning, while operating performance was stronger than estimated.
Take comfort in management’s credit cost guidance despite spike in Stage‐2 assets
Our earnings estimates for FY21/22 remain largely unchanged as the impact of calibration in AUM growth gets neutralized by lower cost growth and provisioning estimates (particularly for FY22). While the disclosure on Stage‐2 assets (8% of AUM v/s usual 2‐3%) could look perturbing, BAF has already built a strong provisioning cover of 32% on it. Additionally, management has retained its full‐year absolute credit cost guidance implying that flow forward post moratorium and resolution experience are in‐ line with company’s expectations. BAF’s earnings performance in ensuing quarters would be strong as growth momentum accelerates and charge‐off rate declines. With growth and credit cost tracking back to long‐term trajectory in FY22, we estimate BAF to deliver 4.3‐4.5% RoA. Stock trades at 22x P/E and 4.5x P/ABV on FY22 estimates. With worst behind, valuation will re‐rate as confidence on growth comes back.
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