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Earnings beat with off-book gaining traction; Strong gold loan growth

Asset quality stress persists in MFI, unsecured MSME and micro-LAP

* IIFL Finance’s (IIFL) 2QFY26 NII grew 7% YoY and ~11% QoQ to ~INR14.4b (inline). Other income stood at ~INR4.9b (PQ: INR3.8b). This was primarily due to higher assignment income of ~INR3.5b (PQ: INR2.3b). 

* Net total income grew ~22% YoY to ~INR19.3b. Opex grew ~19% YoY to INR8.7b (~6% higher than MOSLe), with the cost-income ratio declining to ~45% (PQ: 48% and PY: 46%). PPoP stood at INR10.6b and grew ~24% YoY (~15% beat).

* Credit costs stood at INR5b (inline). This translated into annualized credit costs of ~3.4% (PQ: ~3.65% and PY: ~3.6%). NPAs were impacted by macro trends in MFI, unsecured business/personal and small-ticket LAP.

* PAT (post NCI) in 2QFY26 stood at INR3.8b (~27% beat).

Consol. AUM grew ~35% YoY; Strong 27% QoQ growth in gold loans

* Consol. AUM grew 35% YoY and ~7% QoQ to INR901b. On-book loans grew ~34% YoY. Off-book formed ~32% of the AUM mix, with co-lending forming ~13% of the AUM mix.

* Gold loan AUM stood at ~INR346b and rose ~27% QoQ. Home loan AUM was flat QoQ while MSME loans declined ~4% QoQ and MFI declined ~6% QoQ.

NIM rose ~25bp QoQ; calc. yields rose ~25bp QoQ

* Consolidated yields rose ~25bp QoQ to ~13% while CoB rose 10bp QoQ to ~9.9%.

* NIM (calc.) rose ~25bp QoQ

GS3 declines ~20bp QoQ; Credit costs elevated

* GS3 declined ~20bp QoQ to ~2.14% while NS3 declined ~10bp QoQ to ~1%. PCR rose ~50bp QoQ to ~52.8%. NPAs were impacted by macro trends in MFI, unsecured business/personal loans and small-ticket LAP.

* Portfolio reset with the company sharing that it has exited unsecured MSME, micro-LAP & high-risk MFI geographies.

* IIFL (standalone) CRAR stood at ~18.6% as of Sep’25.

Valuation & View

* IIFL Finance delivered a mixed performance during the quarter, with robust AUM growth led by the gold loan segment, while momentum across other segments remained subdued. Off-book (assignments) and co-lending (in gold loans) is gaining traction and contributing positively to the off-book income. Although GS3 and NS3 ratios improved sequentially, credit costs remained elevated owing to continued stress in the MFI, unsecured lending, and micro-LAP portfolios. NIMs expanded during the quarter, supported by higher portfolio yields.

* The stock trades at 1.4x FY27E P/BV and ~10x P/E. We might revise our estimates after the earnings call on 31th Oct’25.

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