Bajaj Finance: Q2-25 Earnings Call Highlights
Elevated credit costs impacting profitability. Strong volume growth. NIM stabilised, cost of funds peaked. Confident in risk management measures. Expect loan losses to peak & improve in H2
bajajfinserv.in | NSE: BAJFINANCE
1. Key Takeaways
1.1 TLDR
Bajaj Finance is navigating a challenging environment with elevated credit costs impacting profitability despite strong volume growth.
Management appears confident in their proactive risk management measures and expects loan losses to peak and improve in H2.
The company is focused on strategic initiatives to ensure sustainable growth and profitability in the long term.
Key focus areas include strengthening the balance sheet, growing secured businesses, leveraging technology for operational efficiencies, and adapting to the evolving regulatory landscape.
1.2 Operational Highlights:
Key Highlights:
Mixed quarter with strong volume growth but elevated loan losses
AUM grew 29% to ₹3,74,000 crore.
9.7 million loans booked and 4 million new customers added.
Loan losses remained elevated impacting profitability.
PBT grew 14% to ₹5,401 crore, PAT grew 13% to ₹4,014 crore.
ROE stood at 19.1%, Net NPA at 0.46%.
Expects loan loss to average AUM to peak and improve in H2
Cautiously optimistic that loan loss to average AUM has peaked at 2.16%.
Estimate loan loss to average AUM to decline to around 2% by Q4.
FY25 net loan loss to average AUM guidance revised to 2%-2.05%.
Actions taken:
Tightening underwriting norms, particularly for customers with 3+ unsecured loans.
Investing in debt management and risk management infrastructure.
Increasing headcount in deeper geographies to improve collection efforts.
NIM stabilised, cost of funds peaked, room for improvement in operating efficiencies.
NIM expected to improve as cost of funds decrease with a lag of one or two quarters.
Potential NIM improvement to be strategically utilised for growing secure businesses and new lines of business.
Continued focus on optimising operating expenses through rationalisation and GenAI implementation.
Bajaj Auto financing business transitioning to Bajaj Auto Credit Limited (BACL).
Bajaj Finance financing for Bajaj Auto products significantly reduced following BACL's launch.
Short-term impact on profitability expected due to AUM shift, but beneficial in the long term for building a lower-risk portfolio.
Non-Bajaj auto two-wheeler financing business scaling up to compensate for the shift.
Positive updates on credit ratings and customer franchise:
Received investment-grade rating for international borrowings from Moody's (Baa3/P).
Optimistic about crossing 100 million customer franchise milestone in FY25.
1.3 Key Themes:
Asset Quality:
Concerns around elevated loan losses and credit costs.
Management's confidence in peaking loan losses and improvement in H2 based on proactive risk management measures and data analysis.
Detailed discussion on the nature of delinquency trends: lower bounce rates but higher flow rates, impacting collection efficiencies.
Analysis of specific segments like rural B2C and SME lending, which are experiencing higher stress and require tighter underwriting.
Growth and Profitability:
Continued strong AUM growth despite challenging environment, driven by new lines of business.
Strategy to maintain 25%-27% AUM growth and 23%-25% profit compounding in the medium term.
Focus on utilising potential NIM improvement to further strengthen the balance sheet and grow secured businesses.
Emphasis on operating efficiency as a key lever for profitability improvement through cost rationalisation and GenAI adoption.
Business Transition:
Detailed explanation of the shift in Bajaj Auto financing business to BACL and its financial implications.
Management's strategy to mitigate the impact through the growth of non-Bajaj auto two-wheeler financing.
Focus on building a more resilient and less volatile portfolio in the long term.
Regulatory Landscape:
Acknowledgment of RBI commentary on growth and asset quality pressures.
Emphasis on proactive investments in compliance, operational risk, and strengthening all lines of defence.
Refraining from specific commentary on regulatory matters.
Other Key Points:
Discussion on the impact of the co-branded credit card with RBL Bank on fee income.
Management's response to a recent unfortunate incident and steps taken to address the situation.
Update on festive season demand and consumption trends.
1.4 Key Quotes
Credit costs:
"We are cautiously optimistic looking at the portfolio movement or gross flow rate methodology that loan loss to average AUM has hopefully peaked, and we estimate loan loss to average to go down to 2% or so by Q4."
"Between managing risk and managing growth we will choose credit."
NIM and growth:"
We forecast that on a 12-month trailing basis, a 25 basis point drop in repo rate should clearly lead to a 10 to 12 basis point improvement in the NIM. However, we would like to use the NIM improvement to our advantage to grow some of the secured and new lines of businesses that we have added in the last couple of years."
"We remain guided by our medium-term guardrails, which is 25%-27% AUM growth and leading to a 23%-25% profit compounding."
On Bajaj Auto financing transition: "Eventually as this book winds down, we will see the benefit come through in the overall loan loss to average AUM. Correspondingly, the non-Bajaj book for us, because it's an open architecture business, comes in at half the risk cost."
Bajaj Finance Limited Q2 FY25 Earnings Conference Call FAQ
1. What were the key highlights of Bajaj Finance Limited's Q2 FY25 earnings?
Bajaj Finance Limited reported mixed results for Q2 FY25. While the company achieved strong growth in assets under management (AUM), loan bookings, and customer additions, elevated loan losses impacted profit growth and return on assets. Key highlights included:
Consolidated AUM growth of 29% year-on-year, reaching ₹3,74,000 crores.
9.7 million loans booked during the quarter, a 14% increase compared to the previous year.
Addition of 4 million new customers, bringing the total customer franchise to 92.1 million.
Net interest income (NII) growth of 23% reaching ₹8,838 crores.
Consolidated profit before tax (PBT) growth of 14% reaching ₹5,401 crores.
2. What is the outlook for asset quality and credit costs in the coming quarters?
Despite elevated credit costs in Q2 FY25, the company expects loan loss to average AUM to decline to around 2% by Q4 FY25. This cautious optimism stems from various risk management actions taken by Bajaj Finance, including:
Tightening underwriting norms, particularly for customers with multiple unsecured loans.
Investing in debt management infrastructure and capacity planning.
3. What is the company's strategy for mitigating the impact of reduced Bajaj Auto financing business?
Bajaj Finance expects the AUM from Bajaj Auto financing to wind down over the next two years due to the establishment of Bajaj Auto Credit Limited (BACL). To compensate for this, the company is aggressively expanding its non-Bajaj auto two-wheeler financing business.
The non-Bajaj auto two-wheeler financing business is projected to reach a run rate of 480,000 accounts by the end of FY25, with a target of 720,000 accounts by FY26.
By FY27, the company aims to fully replace the lost AUM from Bajaj Auto financing with the non-Bajaj auto two-wheeler business.
4. How does Bajaj Finance plan to improve operating efficiency in the future?
The company is focusing on various initiatives to further enhance operating efficiency, including:
Leveraging Generative Artificial Intelligence (GenAI) across various functions, such as call centers and customer service.
Embarking on a "Phase 3" of digital transformation to optimize processes and reduce operating expenses.
5. What is the company's outlook on Net Interest Margins (NIMs)?
Bajaj Finance believes that its cost of funds has peaked and expects NIMs to stabilize at current levels. The company anticipates a 10-12 basis point improvement in NIM for every 25 basis point drop in the repo rate. However, instead of directly adding to the P&L, Bajaj Finance plans to utilize NIM improvements to:
Grow its secured loan portfolio.
Expand its new lines of business.
6. What are the company's growth expectations for different business segments?
Rural B2C: Expected to grow at 12-14% for the full year, showing signs of recovery after several quarters of slow growth.
Business & Professional Loans: While showing slight elevation in GNPA, the segment is expected to remain stable.
SME Lending: Experiencing some pressure on asset quality, requiring a cautious approach to growth.
New Lines of Businesses: Expected to contribute 2-3% of AUM growth for the current year, gradually increasing their contribution in subsequent years.
7. How is the company addressing regulatory scrutiny and compliance requirements?
Bajaj Finance is committed to maintaining high compliance standards and is proactively investing in:
Strengthening its compliance, operational risk management, and internal audit functions.
Implementing a robust integrated compliance framework and conducting regular reviews.
8. What is the outlook for festive season demand in discretionary consumption categories?
Based on the first 19 days of the festive season, Bajaj Finance is witnessing healthy growth in discretionary consumption:
Unit sales volume growth of around 21% year-on-year.
Value growth of around 19-20% year-on-year, despite some price cooling in certain categories.
Source: Link to Earning Call Transcripts
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