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Earnings miss due to NIM compression and elevated credit costs

Healthy ~40% QoQ growth in gold loans; calc. NIMs decline ~70bp QoQ

* IIFL Finance’s (IIFL) 3QFY25 NII declined ~22% YoY and ~8% QoQ to ~INR12.4b (~7% miss). Other Income stood at ~INR1.1b (PY: INR1.1b). This was because of higher loss on de-recognition of financial instruments and lower gain on fair value changes.

* Net total income (NTI) declined ~21% YoY to ~INR13.4b. Opex grew 3% YoY to INR7.5b (in line), with the cost-income ratio at 56% (PQ: 46% and PY: 43%). PPoP stood at INR6b and declined ~38% YoY (~28% miss).

* Credit costs rose to ~4.2% (PQ: ~3.6% and PY: ~2.1%), primarily because of the stress in the MFI and MSME segments. The quarter was challenging, with asset quality stress in microfinance, unsecured lending, and smallticket LAP reflecting broader macroeconomic trends.

* PAT in 3QFY25 declined ~85% YoY to INR817m. IIFL (standalone) CRAR stood at ~22%.

Consol. AUM declines ~8% YoY; Gold loan AUM rose ~40% QoQ

* Consol. AUM declined 8% YoY while it grew ~7% QoQ to INR714b. Onbook loans grew ~5% YoY. Off-book formed ~30% of the AUM mix, including co-lending, which formed ~13% of the AUM mix.

* Gold loan AUM stood at ~INR150b and rose ~39% QoQ.

* YoY AUM decline was driven by wholesale CRE book (-69%) and microfinance (-14%). Home loans rose ~19% YoY and MSME loans grew ~31% YoY

NIMs contract ~70bp QoQ due to ~70bp QoQ decline in yields

* Consolidated yields and CoB declined ~70bp and 25bp QoQ to ~12.9% and ~9.5%, respectively. Calculated NIMs declined ~70bp QoQ.

* Gold loan portfolio yields remained under pressure as IIFL was working to regain customers.

Minor deterioration in asset quality; credit costs elevated

* GS3 rose ~2bp QoQ to ~2.42%, while NS3 declined ~5bp QoQ to ~1%, driven by a ~330bp increase in S3 PCR to 59%.

* The company reported a deterioration in its MFI asset quality, with MFI GS3 increasing to 5.1% (PQ: 3.4%).

Valuation and view

* IIFL reported a weak quarter, marked by elevated credit costs and a slight deterioration in asset quality. While consolidated AUM declined YoY, the company resumed growth in its gold loan portfolio, which grew by ~40% QoQ.

* The stock trades at 0.9x FY27E P/BV and ~6x P/E. Microfinance subsidiary reported muted disbursements and loan growth in the quarter and also exhibited asset quality stress like its NBFC-MFI peers. We might revise our estimates after the earnings call on 13th Feb’25.

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