Bajaj Finance: Focus shifts from growth to capital preservation

Profit plunges as the lender loses business worth Rs 4,500 cr in 8 days of lockdown

For a business largely dependent by volumes, the March quarter (Q4) results of Bajaj Finance are a good indicator as to how financials can get derailed if lending halts for seven-eight days in a quarter. 

For the first time in six years, Bajaj Finance reported a contraction in net profit, down 19 per cent year-on-year because of higher provisioning costs. Pre-tax profit fell 29 per cent year-on-year. New customer acquisitions plunged 22 per cent sequentially in Q4.  

Before the results, Morgan Stanley had already assumed that new customer growth may be negligible in FY21. With key business segments, such as wholesale consumer durable and automobile, not operating in April, and others, such as retail consumer durable and SMEs, yet to open up, the June quarter for the lender will be a washout. What’s worse, its impact may last for most of FY21.

“Given the environment and risk aversion, the focus will be on conserving capital. Growth isn’t our immediate priority,” Rajeev Jain, managing director, Bajaj Finance, said in a call with analysts. 

 

 

The company would prefer to lend more to existing customers than acquiring new ones. Considering a faster burn in capital in Q4, with capital adequacy falling to 25 per cent from 26.9 per cent in Q3, capital preservation is key. Cost of funds, too, increased to 8.37 per cent in Q4, up 8 basis points sequentially, reiterating the need to conserve capital. However, capital conservation could come at the cost of financial performance.

The provisioning cost shot up from Rs 409 crore last year to Rs 1,954 crore in Q4, as Rs 900 crore was set aside for the Covid-19-related stress. The amount set aside against standard assets rose to Rs 856 crore in Q4, from Rs 34 crore a year ago. A moratorium has been extended very cautiously and based on internal assessment, customers whose loans could turn into non-performing assets (NPAs) have not been given this facility. Thus, only 27 per cent of the loan book came under moratorium. 

While the firm is confident that Q4’s provisioning is adequate to absorb the Covid-19-related losses, whether the salaried customer base (over 60 per cent of the loan book) will remain stable in the current scenario of job losses and pay cuts, is a key monitorable. Management guidance, too, wasn’t very assuring on this front.

 Therefore, while gross NPA remained stable at 1.6 per cent in Q4, with little growth support, this number may increase in FY21.

FY21 will be a test on all fronts for Bajaj Finance, and investors will see how it manages its show amid tepid growth and weak asset quality.