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NIM expansion offset by higher opex and a one-off in credit costs Disbursement growth muted in 2QFY24

 Can Fin Homes (CANF)’s 2QFY24 PAT de

* clined ~14% QoQ to ~INR1.6b (in line), due to higher opex and a one-off in credit costs. CANF’s credit costs stood at ~90bp and included a one-off of ~50bp in provisions towards employee fraud at the Ambala branch, which was identified and reported in Jul’23.

* Repricing existing loans led to a QoQ improvement of ~30bp in yields. Higher yields and stable CoF led to a ~30bp QoQ improvement in (calc.) NIM to ~3.85%. Further, the repricing of ~INR60b of loans over the next quarter would help CANF sustain (or even improve) the yields from hereon. We expect CANF to take actions, which will spur loan growth but lead to a NIM compression from 3QFY24. We estimate NIM of ~3.7%/3.5% in FY24/FY25.

* We model an AUM/PAT CAGR of 15%/17% over FY23-26E with an RoA/RoE of 2.1%/~18% in FY26E. CANF, in our view, is a robust franchise with strong moats on the liability side. At 1.8x Sep’25 P/BV, we believe its valuations are rich and largely price in the positive factors. Reiterate Neutral with a TP of INR840 (based on 2.0x Sep’25E BV). Slippages from the restructured book, which could lead to deterioration in asset quality, will be a key monitorable

Disbursement growth tepid; run-off in loan book moderates

* Disbursements declined 10% YoY to ~INR20.1b (MOSLe: ~INR21.4b) in 2QFY24. Absolute disbursements rose ~INR530m sequentially.

* Advances grew 16% YoY and 3% QoQ to INR333.5b. Run-off in the loan book stood at ~14% (largely flat YoY) during the quarter.

* Management guided for disbursements of ~INR100b in FY24 suggesting that it would need to deliver strong disbursement growth in 2HFY24 (v/s INR40b in 1HFY24). It continued to guide for a loan growth of ~18% YoY in FY24.

Margin improvement driven by residual repricing of loan book

* NIM (calc.) expanded sequentially by ~30bp to 3.85%, due to the full impact of interest rate hikes transmitted on ~INR55b of loans in 1QFY24 and the partial impact of rate hikes from ~INR65b of the loans repriced in 2QFY24.

* The share of CPs in the borrowing mix was stable QoQ at ~7.0% as of Sep’23 (PY: 8.0%). Overall proportion of bank term loans rose ~3pp QoQ. 

Asset quality deteriorates due to slippages from restructured pool

* Asset quality deteriorated with GS3/NS3 rising 13bp/10bp to ~0.76%/0.43% and PCR on S3 loans declining ~250bp QoQ to ~44%.

* Asset quality deteriorated primarily due to slippages from the restructured pool of advances. CANF created a management overlay of ~INR170m in 2QFY24 and the total management overlay stood at ~INR340m (~13% of the Gross Stage 3 loans).

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