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Elevated credit costs from B2C businesses; NIM contracts QoQ Changes in senior management portfolios

* Bajaj Finance (BAF)’s 3QFY24 reported PAT grew 22% YoY to ~INR36.4b (in line), while 9MFY24 PAT grew ~27% YoY to INR106.3b.

* NII grew 29% YOY to ~INR76.5b (in line). Non-interest income grew 9% YoY, and Net Total Income (NTI) grew 25% YoY to ~INR93b (in line).

* 3QFY24 NIM (calc.) declined ~25bp QoQ to ~12.4% while the reported NIM contracted ~10bp QoQ. We model a NIM compression of ~20bp in FY25 due to the expected rise in the cost of borrowings and difficulty in passing on any further interest rate hikes to customers.

* We model an AUM/PAT CAGR of ~30%/27% over FY23-FY26 and expect BAF to deliver an RoA/RoE of ~4.6%/23% in FY26.

* Key monitorables for FY25: 1) the degree to which the NIM compression can be offset with operating leverage, resulting in a decline in cost ratios; and 2) the impact on B2C businesses, both from a growth and credit costs perspective.

* Reiterate BUY with a TP of INR8,500 (premised on 4.6x FY26E BVPS).

AUM growth at ~35% YoY; new customer acquisitions strong

* Total customer franchise rose 22% YoY to ~80.4m. New loans booked grew 26% YoY to 9.9m (PY: 7.8m).

* Total AUM grew 35% YoY and ~7% QoQ to INR3.1t. Sequential AUM growth was driven by Auto Finance (+17%), B2B Sales Finance (+11%), SME finance (+7%), Commercial (incl. LAS) (+9%) and Mortgages (+6%). The rural B2C business (+3%) continued to exhibit muted AUM growth given that BAF has cut business volumes in this segment in the face of higher delinquencies.

Cost ratios broadly stable aided by operating leverage

* Opex grew 22% YoY to ~INR31.6b (in line) and the opex-to-NII was stable QoQ at ~34% during the quarter.

* BAF added 158 new locations and ~9.5K distribution points in 3QFY24. The company will continue to make investments in digital and technology and expects the digital platforms to be fully refreshed by Jun'24. It aims to dominate all digital platforms and deliver ~25% of business volumes from these platforms.

* Operating leverage driven by economies of scale and relatively lower investments on the technology side will drive a moderation in the opex-to-NII ratio to ~32% in each of FY25 and FY26 (vs. FY24E: ~34%).

Minor deterioration in asset quality; credit costs elevated

* BAF’s GS3/NS3 rose ~5bp QoQ each to ~0.95%/0.4%. Stage 3 PCR declined ~4pp QoQ to ~61%.

* Net credit costs in 3QFY24 stood at ~165bp (PY: ~150bp). BAF also utilized ~INR1.5b from the management overlay during the quarter. BAF held a management and macro-economic overlay of INR5.9b as of Dec’23. Credit costs were higher due to elevated Rural B2C delinquencies and lower collection efficiencies in Urban B2C segment.

* Management guided for gross credit costs of 1.75%-1.85%. We model net credit costs of 165bp/155bp/155bp in FY24E/FY25E/FY26E.

Update on the RBI ban and changes in senior management portfolios

* The RBI banned two products, viz. Insta EMI Cards and e-Comm transactions of BAF, in Nov’23. BAF shared that it has made an initial submission (with changes in KFS) to the RBI and that it expects to make the final submission (along with digital signatures and vernacular support) to the RBI within a few weeks.

* Anup Saha (ED) has been re-designated as Deputy MD. In his new role, he will oversee all the businesses of the company (excluding LAS and commercial lending). Anup will report to Rajeev Jain, MD.

* Rakesh Bhatt (ED) has resigned to pursue opportunities outside the company. He will continue to work as an advisor to the MD.

* Deepak Bagati (President, Debt Management Services), Sandeep Jain (CFO), and Anurag Chottani (Chief Information Officer) have been given additional responsibilities and promoted to Chief Operating Officer (COO). All three COOs will report to the Deputy MD.

Highlights from the management commentary

* The RBI has granted a one-year extension to BAF’s co-branded credit card with RBL Bank. The RBI had observed some deficiencies in its co-branded credit cards. BAF management shared that it will work closely with RBL Bank to get these deficiencies ironed out.

* The RBI increased risk weights on consumer credit exposure to ~125% from ~100%. This had an impact of ~290bp on the company’s CRAR.

Valuation and view

* Customer acquisitions and the new loan trajectory have been strong. The momentum will only get stronger going ahead, with the digital ecosystem – app, web platform, and full-stack payment offerings – in place.

* BAF should be able to offset the NIM compression in FY25 with lower operating cost ratios. Our EPS estimates are largely unchanged. We expect BAF to deliver a PAT CAGR of 27% over FY23-FY26, and an RoA/RoE of 4.6%/23% in FY26. Maintain BUY with a TP of INR8,500 (premised on 4.6x FY26E BVPS).

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