Bajaj Finance - A quick glance at the Executive Summary for Q2 FY21

The below pointers highlights key extracts from Balance sheet, company's liquidity, operational expense, credit cost, profitability and update on business transformation project. The Company booked 3.62 MM new loans during Q2 FY21 as against 6.47 MM in Q2 FY20. Management is currently witnessing MoM improvement in volumes across all businesses. Company acquired 1.22 MM new customers in the current quarter. Consolidated PBT for Q2 contracted by 35% to Rs 1,305 cr. Company had consolidated liquidity buffer of Rs 24,775 cr and SLR investments of Rs 2,582 cr. 

Balance Sheet and Franchise:

1. The Company has restarted origination across all businesses except REMI (452K accounts - 6.9%) and wallet loans (152K accounts - 2.3%) which are on pause mode till January and March respectively. The Company booked 3.62 MM new loans during Q2 FY21 as against 6.47 MM in Q2 FY20. Management is currently witnessing MoM improvement in volumes across all businesses.
2. The Company continued to maintain a conservative stance on volumes till August, given extended moratorium and absence of updated bureau data. From September, the Company has started to accelerate volumes across all businesses. Bureau information is expected to be fully on stream by November which should further aid volume momentum.
3. In September, versus previous year, urban consumption businesses (B2B) were at 72%, rural consumption business (B2B) at 91%, credit card origination at 73%, ecommerce at 75% and auto finance business was at 54% of last year’s volume.
4. In September, loan disbursements (B2C, SME, Rural B2C, Mortgages) were at 62% of last year’s volume.
5. The Company acquired 1.22 MM new customers in the current quarter. Total customer franchise stood at 44.11 MM as of 30 September 2020, a growth of 14% YoY. Cross sell franchise stood at 23.87 MM.
6. Existing customers contributed to 66% of new loans booked during Q2 FY21.
7. AUM growth moderated to 1% YoY. It stood at Rs 1,37,090 cr in Q2 FY21. The Company estimates AUM growth for FY21 at 6-7%. If the momentum by Q4 is stronger, there may be a potential upside.
8. So far, risk metrics of new volumes originated across businesses are tracking better than pre-Covid-19 origination.
9. In Q2 FY21, the Company has converted Rs 1,750 cr of term loans into flexi loans to provide customers the flexibility of lower repayment and higher prepayment.
10. The company’s plan is to achieve Feb 20 (Pre -COVID-19) loan originations by March / April 21. This would position the Company to take advantage of a strong economic upturn in FY22.

Liquidity Management

1. As of 20 October 2020, the Company had consolidated liquidity buffer of Rs 24,775 cr and SLR investments of Rs 2,582 cr. This represents 21.9% of its total borrowing. The carry cost of total liquidity in Q2 was Rs 220 cr as against Rs 47 cr in Q2 FY20.
2. Given favorable market conditions, the Company will slowly dial down its liquidity buffer over the next 6 months and expects to revert closer to pre-COVID-19 liquidity buffer by March 21. It will also ensure that the cost of excess liquidity normalizes by Q4.
3. Deposits book stood at ₹ 21,669 cr, a growth of 23% YoY. Its contribution to consolidated balance sheet was 17% as of 30 September 2020. The Company continued to attract sizable retail deposits in Q2. The Retail : Corporate mix stood at 75 : 25 in Q2 FY21 as against 56 : 44 in Q2 FY20 in line with its strategy of reducing its reliance on corporate deposits.

Operating expense management

1. Given COVID-19, in April, the Company had a choice to make. Significantly cut cost or grow volumes over the next 6 months. Management chose to cut costs. In Q2, despite higher fees and commission cost to the tune of ₹25 crore, the overall operational expense is down by Rs 224 crore. As a result, NII grew by 4% but opex de-grew by 16%. Opex to NII improved to 27.8% in Q2 FY21 as against 34.6% in Q2 FY20.
2. Some of these cost cuts are structural in nature and some are transient. As the company gets back to growth and simultaneously implement their transformation plan, the overall Opex to NII will be much lower.
3. The Company has now started to gradually roll back some of its actions of operating expense management. The Company has reinstated its quarterly incentive plans for its staff from Q3 onwards. However, call center optimization, freeze on travel, advertising & promotion and deferred physical trainings etc will continue in Q3 as well.

Credit Costs

1. Loan loss and provisions estimates for FY21 are based on lifetime loss estimates on account of COVID-19. This also means that the Company is accounting for additional losses that may otherwise occur in FY22.
2. FY22 onwards, loan losses and provisions should revert to pre-COVID-19 levels of 160-180 bps of average assets. If recoveries are better in FY22 against provisions taken in FY21, management may experience lower net loan loss to average assets.
3. During the quarter, the Company has further increased its provisioning coverage for stage 1 and 2 assets by Rs 1,370 cr taking it to Rs 5,099 cr as of 30 September 2020
4. The Company experienced continued improvement in portfolio quality in Q2. Against 15.7% of moratorium book in June 2020, stage 2 (1 and 2 installments overdue) book as of 30 September 2020 stood at 8.0% versus 2.3% in Q2 FY20
5. The Company last provided an update on its credit cost scenario model on 21 July 2020. As of September 2020, the Company is holding its credit costs estimate at Rs 6,000 – Rs 6,300 cr for FY21 in addition to 1,150 Cr (900 Cr of COVID-19 provision & 250 Cr of estimated write off recovery) provisioned in Q4 FY20. Our loan loss models are currently projecting an improvement to this estimate. The Company continues to roll forward its loan loss forecast every month by each of its portfolio.
6. So far, the Company has taken a loan loss provision of Rs 3,386 cr against its credit cost estimate of Rs 6,000 – Rs 6,300 cr for FY21. Based on current risk estimates, the Company has to residually take Rs 2,600 – Rs 2,900 cr in H2 FY21.
7. Pursuant to the RBI resolution framework for Covid-19 related stress dated 6 August 2020, the Company has provided resolution plan on assets worth Rs 252 cr (Rs 214 cr in Mortgages & Rs 38 crore in Consumer) as of 30 September 2020.
8. Additionally, as a matter of prudence, the Company has reversed capitalized interest amounting to Rs 142 cr on loans under moratorium. Overall amount of interest income reversed in H1 FY21 stood at Rs 361 cr.
9. GNPA and NNPA for the quarter stood at 1.03% & 0.37% respectively. Adjusted GNPA and NNPA stood at 1.34% and 0.56% respectively.

Profitability

Consolidated PBT for Q2 contracted by 35% to Rs 1,305 cr after taking additional provisions for stage 1 and 2 of Rs 1,370 cr, cost of additional liquidity of Rs 173 cr and interest income reversal of Rs 142 cr. The Company has strong pre provisioning profitability.

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Update on Business transformation project:

1. The Company has significantly accelerated its 3rd transformation journey. The Company is in the middle of significantly strengthening its technology, data science, app design and content design teams. The Company is working towards delivering a transformed customer experience model for it 105 MM customers and prospects by June-July 21. 30.
2. Once implemented, this transformation should lead to significantly higher velocity at much lower cost.

(Authored by Rahul Kamdar)