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Higher write offs led to elevated provisioning; stressed asset formation subsiding materially

CreditAccess Grameen (CAGL) continued to show improving trend in earnings trajectory as Q2FY22 consolidated earnings grew 2x QoQ to Rs597mn driven by strong NII growth at 6% QoQ and sequentially lower provisions at Rs1.4bn vs Rs1.9n in Q1FY22. Notably, with improving collections and subsiding stressed asset formation, CAGL continued to invest in growth – added >900 people and >120 branches during H1FY22. Collections improved to 94.3% / 87% by Oct’21 from 91% / 83% in July’21 for CAGL & MMFL, respectively. Similarly, PAR 0 portfolio shrunk to 9.9% in Oct’21 from 21.9% in July’21 for CAGL. Disbursements improved to Rs34bn in Q2FY22 from Rs9bn in Q1FY22 for CAGL and Oct’21 disbursements remain steady at Rs11.4bn vs Rs11.1bn in Sep’21. Considering improved economic outlook and lower incremental stressed asset formation, it expects AUM growth to remain at 17- 19%, guiding credit cost of 4.7-4.9% led by higher write offs in FY22e. We believe subsiding asset quality challenge, strong CAR at 26% and normalised credit cost would ensure RoA reviving to 3.4% by FY23e. Maintain BUY. Key risks – A) Stress unfolding higher than anticipation and B) delay in growth recovery.

* Core performance remained robust. CAGL’s consolidated earnings grew 2x to Rs597mn driven by strong NII growth at 6% QoQ and lower provisions. Disbursements jumped >3x to Rs34bn in Q2FY22 vs Rs9bn in Q2FY22, leading to 5% QoQ growth in AUM. Incremental growth was largely driven by higher ticket size as reflected in 1% QoQ decline in total customer base to 3.75mn while 6% QoQ increase in average ticket size. NIM expanded 100bps QoQ to 11.2% largely due to change in asset mix towards lending. Further, 100bps reduction in marginal cost of borrowing should support NIM in coming quarters. It continued to utilise strong operating performance to invest in growth – it added >900 people and >120 branches during H1FY22 to capture growth opportunities going ahead. However, taking cognisance of improving collections and sharp recovery in disbursements, it expects 17-19% AUM growth in FY22e. Healthy capital position with CAR at 26% and strong liquidity at ~11% of total assets will ensure revival in AUM growth quicker than peers.

* Steady improvement in collections; most non-paying customers are already tagged NPL. CAGL’s collection (ex-arrears) improved to 94.3% in Oct’21 from 91% in July’21 with non-paying customer pool of 4.7%. GNPL for CAGL stands at 7.2% against which it carries ECL provision of 5.5% as on Sep’21. For MMFL, collection remained lower than CAGL at 87% in Oct’21 vs 83% in July’21. Similarly, GNPL is higher than CAGL at 10.2% against which it carries ECL provision of 7.8% as on Sep’21. Total restructured book stands at 1.5% / 0.2% for CAGL & MMFL, respectively. Improved collections led to sharp reduction in PAR 0 portfolio for CAGL to 9.9% in Oct’21 from 21.9% in July’21.

* FY22e credit cost transitory in nature; expect normalised credit cost in FY23e. Management highlighted that while it is confident about normalised credit cost in FY23e, current non-paying customer pool of 4% would be write-off in H2FY22e, which will result in elevated credit cost in FY22e. Further, alignment of stage 3 recognition policy for MMFL at 60+ DPD, in-line with CAGL, would also result in higher credit cost. However, we view this as transitory and event-led in nature.

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