Stress flow as expected ‐ Management commentary on Growth and Credit Cost soothing
* Overall Covid stress that came to the fore stood at 4‐5% of AUM, which was in line with street’s expectations. Its impact on the revenue line came through huge interest reversals, which along with still high negative carry (while the liquidity buffer was dialed down) led to tepid show on NII and PPOP fronts. Despite the NPL flow of ~3% of AUM, restructuring of 1.4% and one‐time large write‐off of unrecoverable accounts, the credit cost in Q3 FY21 was lower than preceding quarter with BAF utilizing the Covid‐related provisioning buffer (residual at 50‐ 60bps of AUM).
* Asset quality trends are encouraging ‐ a) collection efficiencies in bucket 0 back to pre‐COVID levels and in early buckets (1 and 2) are significantly better than pre‐ COVID levels, b) ~Rs12bn of customers have upgraded from stage‐2 to stage‐1 with collections and recoveries (sequential reduction in Stage 2 & 3 combined) and c) risk metrics of new volumes originated across businesses are tracking significantly better than pre‐COVID origination
* Residual credit cost in Q4 FY21 estimated at Rs12‐12.5bn (lower than Q3) with upside risks from collection efficiencies remaining better through the quarter. Management expects credit cost to revert to pre‐COVID levels of 160‐170 bps from FY22, again with upside risks from higher recoveries.
* On growth, the management expects to attain pre‐Covid run‐rate in Q4 FY21. Most businesses have started disbursing 85‐100% of last year’s volumes with incremental growth being observed every month. In mortgages, BAF has taken pricing actions to revert to pre‐COVID traction.
* Margin profile in all lines of businesses is steady other than mortgages. The expected decline in funding cost, normalization of BS liquidity and reduction in delinquencies to aid margins in ensuing quarters. With business transformation process underway that focuses on enhancing business efficiencies and productivity, a material structural improvement in cost metric would be achieved in coming years.
We believe that we should be ahead of consensus in projecting 30% earnings CAGR over FY20‐23. Estimate RoA moving closer to 5% in FY22/23 on the back of core cost/income improvement and normalization of credit cost. See BAF delivering 23‐ 24% RoE with controlled leverage. With the return of potential growth and estimated delivery of best‐ever return ratios, the threat to current high valuation is low. Retain ADD rating with 12m TP of Rs5,500.
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