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Increase in credit cost guidance a negative; 2H recovery on track

NIM expansion and moderation in credit costs to drive RoA improvement

CreditAccess Grameen (CREDAG) guided ~70–100bp higher credit costs in FY26 and credit costs of 4.0-4.5% in FY27 (including 70–80bp higher provisions from the ECL revision). While the upward revision in credit cost guidance is a nearterm negative, underlying business trends and expected recovery in 2H remain on track.

* CREDAG’s 2QFY26 PAT stood at INR1.3b (vs. MOFSLe at INR900m). NII was flat YoY at ~INR9.3b (in line). PPOP grew ~3% YoY to INR6.9b (in line). The cost-to-income ratio dipped ~1pp QoQ to ~32.5% (PQ: ~33.5%/PY: ~30.6%).

* Reported yields improved ~40bp QoQ to ~20.7%, and CoF declined ~10bp QoQ to 9.6%. NIM improved ~50bp QoQ to ~13.3%. We model NIM (calc.) of 14.9% each in FY27/FY28 (vs. ~15.3% in FY26E).

* The company delivered an improved performance in 2QFY26, despite a seasonally weak quarter. Disbursements rose ~33% YoY to ~INR53b. AUM declined 1% QoQ and grew ~3% YoY to ~INR259b (PY: ~INR251b). The borrower base declined ~7% QoQ to ~4.44m (PQ: ~4.6m). The company plans to scale its retail finance business going forward, and we expect CREDAG to deliver 14% GLP growth in FY26, with far stronger disbursement momentum in 2HFY26.

* NIM improved ~50bp QoQ to 13.3%, driven by improvement in yields and a minor decline in CoB. CREDAG expects another 50bp yield benefit as pricing changes flow through. Lower interest reversals, coupled with an improvement in operating leverage, will improve profitability. Management guided for opex is expected to moderate to 4.6–4.7% by end-FY26 and to 4.3% by end-FY27, aided by improved productivity and better utilization of the branch network.

* On the asset quality front, the company witnessed minor asset quality weakness in MP (partly due to rains), Maharashtra, and Bihar, whereas the other states exhibited largely stable asset quality trends. The company has not seen any election-related impact in Bihar as yet. Management reiterated that asset quality remains stable, with stress largely localized in certain states and manageable. With accelerated write-offs now largely complete, we believe the company will now embark on an improving profitability trajectory from 2HFY26.

* While our FY26 PAT estimates are broadly unchanged, we cut our FY27/ FY28 EPS estimates by 14%/9% to factor in higher credit costs. We estimate a CAGR of 18%/52% in AUM/PAT over FY25-28, leading to an RoA/RoE of ~4.7%/18.3% in FY28. CREDAG trades at 2.6x FY27E P/BV, and its premium valuations over its MFI peers would be sustained. We reiterate our BUY rating with a revised TP of INR1,690 (based on 2.7x Sep’27E P/BV).

Asset quality improves; credit costs likely to moderate going forward

* GNPA declined ~1pp QoQ to 3.7%, while NNPA improved by ~50bp QoQ to ~1.3%. S3 PCR increased ~3pp QoQ to ~66.3%. Annualized credit costs declined to ~8.2% (PQ: 8.9% and PY: 6.7%).

* Total write-off stood at INR6.8b in 2QFY26 (including INR5.55b of accelerated write-offs). Additional credit costs of ~INR1.7b were taken against non-paying 180dpd customers. The management stated that the company has largely completed its accelerated write-off cycle, with limited residual cleanup expected in the subsequent quarters.

* Collection efficiency (including arrears) improved to 94.9% in 2QFY26 (PQ: 93.4%) and stood at 94.9% in Sep’25. Collection efficiency (excluding arrears) increased to 94.5% (PQ: 93.2%), whereas it stood at 95.3% in Sep’25.

* The company guided ~70–100bp higher credit costs in FY26 and credit costs of 4.0–4.5% in FY27 (including 70–80bp from ECL revision).

Highlights from the management commentary

* Management expects 2H to be better, with 3Q and 4Q, being typically strong quarters; with on-ground normalization, the company remains confident of achieving its FY26 GLP growth guidance.

* The company added 440K new borrowers in 1HFY26, of which 220K were added in 2Q. About 39% of new 2Q borrowers were new-to-credit (NTC) customers. The portfolio share of unique borrowers increased to 41%, highlighting deeper market penetration.

Valuation and view

* CREDAG has successfully navigated a period of industry-wide challenges, demonstrating remarkable resilience, and has reverted back to its normalized operational efficiency. New stress formation (including in Karnataka) has normalized, supported by robust internal processes, stable PAR bucket roll forward rates, and range-bound PAR 15+ accretion rate.

* With structural levers such as branch network expansion and strengthening collection efficiency across key geographies firmly in motion, it is wellpositioned to deliver a strong improvement in loan growth and profitability from 2HFY26 onwards.

* CREDAG trades at 2.6x FY27 P/BV. With a strong capital position (Tier-1 of ~25%), it will embark on a strong loan growth trajectory with further normalization in its delinquency trends. We reiterate our BUY rating with a revised TP of INR1,690 (based on 2.7x Sep’27E P/BV).

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