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One-time MTM loss on AIF investments led to earnings miss

RBI gold loan ban resulted in gold AUM declining to <INR160b as on date

* NII in 4QFY24 grew 39% YoY to ~INR16.5b (15% beat). Non-interest loss stood at INR873m (3Q: gain of ~INR1.1b) because of MTM loss of ~INR2b on AIF investments (sold to ARC) and loss of ~INR0.9b on unwinding of prior assignments.

* Opex grew 25% YoY to INR7.7b (in line), with the cost-income ratio of 49% (~43% YoY). PPoP declined ~2% YoY to INR7.9b (23% miss).

* 4Q PAT (post-NCI) declined 10% YoY/24% QoQ to ~INR3.7b (22% miss). FY24 PAT grew ~18% YoY to INR17.6b. FY24 RoA/RoE stood at 3.4%/18.4%. IIFL (standalone) CRAR stood at ~20% (Tier 1: ~13%). IIFL raised ~INR12.7b through a rights issue in May’24, which will further improve CRAR.

Deceleration in AUM growth due to ban on gold loans

* Consol. AUM rose 22% YoY and ~2% QoQ to INR790b. On-book loans grew ~27% YoY. Off-book formed ~36% of the AUM mix, including co-lending, which contributed ~15% of the AUM mix.

* Disbursements (core products) declined ~15% YoY/2% QoQ, led by YoY decline in home loans, gold loans and microfinance loans. The company is treading cautiously in microfinance due to funding constraints from banks. After the RBI’s ban on gold loans, banks have been cautious in lending to the other businesses of IIFL Finance. IIFL Samasta’s incremental sanctions from banks have been impacted more than those of its HFC subsidiary. We estimate an AUM CAGR of ~16% over FY24-26.

CoB showed no signs of uptick because of lower incremental borrowings

* Consolidated yields/CoB for FY24 stood at 17.2%/9.1% (9MFY24: 17.2%/9.1%). We model NIM of ~7.6%/7.7% in FY25/FY26 (FY24: 8.3%).

Cost ratios to remain elevated; no rationalization in gold business opex

* Opex grew 25% YoY to INR7.7b (in line), with the cost-income ratio of 49%. This increase was attributable to a decline in the gold loan business. The management shared that the cost ratios are expected to remain elevated until gold loan operations resume and normalize.

* IIFL Finance has not done any employee layoffs in the gold loan business during the quarter. Employees in the gold loan division are being crosstrained for cross-selling unsecured business loans, LAP, and insurance. The management sounded confident of positive action soon from the RBI after it reviews a special audit report submitted by the auditor. The company is preserving its branch infrastructure and workforce in preparation for a full resumption of its gold loan business after the RBI ban is lifted.

* We expect opex-to-avg AUM of 4.0%/4.1% for FY25/FY26.

Asset quality deteriorated; one-time credit costs from CRE and gold loans

* GS3 rose ~60bp QoQ to 2.3%, while NS3 rose ~30bp QoQ to 1.2%. Credit costs declined to ~1.9% (~2.1% in 3QFY24 and ~2.2% in 4QFY23).

* GS3 in gold loans rose to 3.8% (3Q: 0.8%). Earlier, gold loans with LTV of <75% and customers in default were rolled over. Auditors asked for ~INR2.8b of such gold loans to be classified as NPAs. IIFL has made provisions for these gold loans. The management shared that it anticipates gold loan NPAs to normalize by 1HFY25.

* One loan exposure in CRE of ~INR600m has been classified as NPA and few CRE accounts were sold to ARC during the quarter.

* We expect credit costs to increase to 2.2% in FY25 and then gradually decline to 1.9% in FY26.

Highlights from the management commentary

* A special audit has been completed and the report has been submitted by auditors to the RBI. The company is confident that it has addressed all the deficiencies highlighted by the RBI and it is now compliant with all the RBI guidelines.

* The management did not share any guidance on AUM growth as its focus will remain on compliance and risk control in FY25.

* Gold loans declined to <INR160b as on date vs. ~INR234b as on Mar’24.

Valuation and view

* IIFL management shared that the company is now compliant with all the RBI observations, which led to the ban on gold loans. The special audit commissioned by the RBI in Apr’24 has been completed. The RBI’s review is awaited and the company expects positive action soon. In FY25, IIFL will focus on making its assurance functions across risk management, audit and compliance, more robust for better-quality AUM growth.

* The stock trades at 1.3x FY26E P/BV and ~9x P/E for a PAT CAGR of ~16% over FY24-FY26E. We estimate RoA/RoE to decline to 3.0%/15% in FY25 (because of impact of gold loan ban) but recover to 3.4%/16.2% in FY26. Our estimates are based on assumption of the gold loan ban getting revoked by Sep’24 and IIFL regaining gold business momentum in 2HFY25. We have a BUY rating on the stock and a TP of INR570 (based on SOTP valuation; refer table below).