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A strong show and firm commentary

BAF delivered a largely in-line operating performance with a mild 1-3% miss on PPOP/PAT. AUM growth (up 7% qoq/31% yoy) and customer franchise addition (up 4% qoq/19% yoy) was strong. Asset quality and credit metrices improved, underpinning moderate credit cost (1.5%). NII growth (up 5% qoq/31% yoy) and NIM movement (+10 bps qoq/+20 bps yoy) was on expected lines, underpinned by transmission of increasing CoF. Opex growth (up 5.6% qoq/24% yoy) remains elevated, represented sustained investments in omnichannel strategy (geo expansion, app platform, web platform). However, Opex/NII ratio remains under check. RoA/RoE for the past two quarters being delivered at 5.3%/23%, materially higher than long-term objectives.

FY23 guidance on every metric is encouraging viz. a) co. is confident of adding 10-11mn new customers, b) credit cost estimated at 1.35-1.45% of avg. assets, c) NIMs to be maintained with focus on protecting margin profile across products and d) Opex/NII to taper from H2.

Improvement in asset quality; robust accretion in AUM/customer franchise

Stage-2 assets were down 10%+ qoq and Stage-3 assets were stable in absolute terms. OTR assets now only at Rs3.4bn, comprising solely of mortgages. ECL Coverage on Stage-3 assets improved qoq from 60% to 62.3%, while it was stable on Stage-2 assets at near 30%. At the product level, decline in GNPL ratio was seen in 2w/3w financing and Mortgages. Management overlay provisions were maintained at Rs10bn (~40bps of AUM), which BAF could use to strengthen its ECL model. Sequential growth in AUM was led by consumer B2C lending, Mortgages, SME lending and Commercial Finance. Robust traction in customer franchise continued, and the non-delinquent/cross-sell customer base grew by 19% yoy/24% yoy.

BAF remains confident about its growth prospects in the near-term as well as in longer run, notwithstanding its increasing size and inclusion in regulatory Upper Layer of NBFCs. A multi-product well-diversified franchise allows the co. to smoothly navigate through cyclical and transient competitive pressure in any product segment. We forecast 27% AUM CAGR over FY22-24. With rising scale, opex productivity would be a key monitorable amidst co. going fully digital across all products and services on App as well as Web by March 2023. We see BAF delivering 4.6-4.9% RoA and 22-24% RoE over next two years. Hold a constructive view on BAF with a 12m PT of Rs8500. Earnings estimates have seen marginal upgrade.

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