Home >Markets >Mark To Market >Bajaj Finance has done well on growth; what about asset quality?

Consumer lender Bajaj Finance Ltd’s early update on the September quarter had all the signs of a swift recovery from the impact of the restrictions imposed to battle the second wave of the covid-19 pandemic.

However, given that most lenders seem to show this encouraging trend, the consumer lender needs to do more to keep investors interested and valuations acceptable.

As such, shares of the non-banking financial company (NBFC) have surged 46% year-to-date, leaving the broader Nifty far behind. Even shares of peers such as SBI Cards and Payment Services Ltd, which give close competition, pale in comparison to the consumer lender’s gains.

Swift rebound
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Swift rebound

Bajaj Finance, in an exchange filing late on Tuesday, said that it added 2.4 million new customers during the September quarter. This is 26% higher than the previous quarter and double the number of customers it added a year ago.

New customers formed 62% of the total borrower base, up from 59% in the previous quarter. What is more is that new loans grew 37% sequentially and 75% from the year-ago period.

All this led to a decent 5% growth in assets under management (AUM) on a sequential basis.

“The 2QFY22 business update seems to suggest that there has been a rapid normalization across business segments and this trajectory would continue in 2HFY22E as well, with return on assets/return on equity likely to rebound to 3.8%/18.2% in FY22E," analysts at Motilal Oswal Financial Services Ltd wrote in a note.

Bajaj Finance has improved its AUM growth steadily in the aftermath of the pandemic. Business was hit again during the second wave of the covid-19 pandemic, but has rebounded since then. This gives enough reason for investors to keep the faith in the company’s growth trajectory.

What’s more is that the lender is looking to foray into the payments market with Bajaj Pay. The lender launched a wallet business in July through which it is getting close to 1 million wallets every month. In an interaction with analysts last month, Bajaj Finance’s management said that the aim is to get 20-25 million wallets by end of March 2023.

In earlier interactions, the company indicated that Bajaj Pay would be a single-point access to a slew of payment solutions for its customers. The wallet business is one part of this ecosystem. The lender aims to get a licence for being a payment aggregator.

All this is likely to help the lender on the growth front. Further, the transition from being a pure lender to a more rounded fintech outfit would be favourable to valuations too.

That said, for valuations to improve, the lender needs to deliver on asset quality.

The June quarter was discomforting on this front as gross bad loans rose to form 2.96% of the total book, compared to the 1.79% in the previous quarter. Borrowers across categories had shown an increase in stress with auto loans and small business loans particularly showing a spike in delinquencies.

Investors would want to know how the lender has been able to check these stress points in its balance sheet in the September quarter.

A reduction in stress would augur well for provisions and, therefore, for profitability.

In a 23 September report, analysts at ICICI Securities Ltd had pointed out that the lender may see improvement in its asset quality in the second half of FY22.

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