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Back to pre-pandemic growth and profitability; structural framework in place for further improvement

Our view

BAF’s core operating performance was stronger-than-expectations (3%/6% beat on NII/PPOP) with return to pre-pandemic levels of franchise growth (AUM/customer base up 26%/20% yoy), asset quality construct (Stage 2/3 at 2.9%/1.7%) and profitability metrics (RoA/RoE at 5.1%/21.2%). Consistent investments in distribution, resources/sales channels and technology (phase 1 of the digital platform has just gone live) is structurally supporting the franchise growth. Management is of the view that annual customer franchise addition should accelerate to 8-9mn as against earlier 7-8mn with increase in adoption of new App.

We see around 25% CAGR in BAF’s AUM growth over FY21-24. Normalization of interest reversals and debt management costs, and operating leverage from the digital investments would uplift PPOP margins in ensuing quarters. Covid third wave has not had much impact on business and collections thus far, but uncertainty around further waves caused management to augment overlay provisions (60 bps of AUM) and commensurately increase the full-year credit cost guidance (to Rs48-49bn, of which Rs41bn provided in 9m FY22).

Our FY23-24 earnings/ABV estimates undergo material upward revisions of 5-7%/2- 3% on lifting of growth assumptions considering more visible growth tailwinds in consumer finance (ex. Auto Finance) and housing finance and enhanced customer cross-sell/acquisition velocity from the omnipresence strategy (app/platform based customer engagement offering high convenience to purchase, finance, pay, invest, insure, etc.). The likely expansion of return ratios would drive an accelerated earnings growth (a 3-fold jump during FY21-24), which would support high stock valuations (trades at 7.5x FY24 P/ABV). BAF offers a much superior growth and profitability metrics within our financials coverage universe. Upgrade stock to BUY with increased 12m PT of Rs9,000.

Key Result Highlights

* BAF delivered a 6% PPOP beat on our estimates, with NII/Opex being 3%/1.5% better - 40% higher loan impairment provisions (fully attributable to increase in management overlay) drove a PAT miss of 4%.

* Large reduction of 10%/25% in Stage-2/Stage-3 assets underpinned by stronger collections and recoveries, as write-offs remain low at Rs2.1bn (13 bps of AUM) - significant pull-back in asset quality/GNPLs, through led by Auto Finance, was seen across products.

* Credit cost was at annualized 1.7%, excluding the ~Rs3bn augmentation to management overlay (now at 60bps of AUM) - BAF raised provisions to 22%/28% on OTR/non-OTR Stage-2 loans.

* FY22 credit cost now expected at Rs48-50bn (2.8-3% of AUM) v/s Rs43-44bn earlier as the company intends to exit the year with enough management overlay in the wake of continued Covid uncertainty.

* AUM growth of 9% qoq/26% yoy was at pre-pandemic velocity – consumer finance (ex. Auto Loans), mortgages and LAS were key growth drivers - nondelinquent customer base grew by 5.5% qoq/21% yoy and cross-sell franchise grew by 24% yoy.

* NII grew by robust 12.5% qoq/40% yoy on the back of lower interest income reversals, favourable growth mix (expansion in calc. portfolio yield) and further decline in CoF (despite longer tenor fresh borrowings).

* Opex was marginally below expectations and the opex/NII ratio fell materially qoq to 34.7%. Normalization of debt management cost is likely to further improve this ratio in the mediumterm.

* There was significant increase in consumer app customer base, EMI store visits and loans booked, new EMI card customers acquired digitally, and point-of-sale transformation led personal loan and credit card distribution.

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