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In-line show; management commentary strong

BAF delivered a largely in-line operating performance with a mild 3% miss on PPOP and PAT due to higher opex (up 13% qoq/73% yoy) that represented continuous investment in people and tech for growth and profitability expansion. Core AUM growth and customer franchise addition was reasonably strong. Asset quality improved across products, underpinning moderate credit cost. NII growth/NIM movement was on expected lines, but CoF reduction was a surprise. FY23 guidance on every metric is encouraging viz. a) co. is confident of adding 9-10mn new customers, b) NPL levels expected to further come down and credit cost estimated at 1.35-1.45% of avg. assets, c) NIMs to be maintained with gradual rise of CoF and lending rates hikes and d) Opex/NII to start tapering from H2.

Improvement in asset quality; strong growth in core AUM/customer franchise

Stage-2/Stage-3 assets were down 8%/19% qoq and GNPA/NNPA stood at 1.25%/0.51% v/s 1.60%/0.68% as of March. Write-offs, other than of Rs4bn commercial account, have been flattish over past three quarters. Except for 2w/3w finance, credit metric/quality of all other businesses is similar or better than pre-Covid level. Credit cost was at annualized 1.5% but includes Rs1.9bn provisions towards abovementioned commercial account. Management overlay was maintained at Rs10bn (~50bps of AUM).

Core AUM (ex-IPO Financing) growth was at 6% qoq/31% yoy. Sequential growth was led by consumer finance (ex. Auto Loans), complimented by brisk momentum in Mortgages and SME lending. BAF recorded highest-ever quarterly increase in customer franchise, and the non-delinquent/cross-sell customer base grew by 22% yoy/26% yoy.

Margins to be maintained; Opex/NII to start tapering

NIM expansion in Q1 FY23 was on expected lines, driven by seasonal shift in AUM mix towards better-yielding Consumer Finance portfolio and reduction in CoF. To protect margin profile across businesses, BAF has started increasing pricing across products from June. Co. expects a gradual increase in CoF, as bank borrowings in stand-alone entity are largely linked to MCLRs and avg. deposits tenor is 30-33 months. Opex/NII should start tapering from H2 FY23 with co. having taken a pause on investments.

BAF is looking to double its AUM over next three years (26% CAGR) while maintaining its return metrics. In the medium term, the key monitorable would be opex productivity as the co. goes fully digital across all products and services (on App by January 2023 and Web by March 2023). We see BAF delivering 4.5-4.6% RoA and 23- 24% RoE over next two years. Hold a constructive view on BAF with a 12m PT of Rs8140. Earnings estimates have seen some upgrade, but we have moderated target multiple to reflect eventual conversion into a bank.

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