Can growth offset Bajaj Fin’s margin woes?



A slight dip in asset quality and a potential net interest margin (NIM) compression for the rest of FY24 are some points of concern.

Bajaj Finance Ltd’s September quarter (Q2FY24) results are strong on many counts. Net profit grew by 28% year-on-year to 3,551 crore on the back of a 33% surge in assets under management (AUM). AUM growth was broad-based across segments such as auto finance, SME lending, commercial lending. New loan bookings were up 26% while deposits grew by 39%.

However, a slight dip in asset quality and a potential net interest margin (NIM) compression for the rest of FY24 are some points of concern. NIM is a profitability measure for lenders. In Q2, Bajaj Finance said its NIM fell by 14 basis points (bps) sequentially. This was mainly led by a 6 bps rise in cost of funds to 7.67%. As expected, NIMs were strained in Q2, attributable to higher cost of funds, upward re-pricing of old liabilities, risk building up in small ticket lending segments on the unsecured side, and high-yielding assets (rural/consumer) being pared down, said Shweta Daptardar, vice president – institutional equity research, Elara Capital.

Management has guided that NIM may see another 25-30 bps fall in the second half of FY24. This is because funding costs will rise with low-cost borrowings likely to mature in the coming quarters and Bajaj Finance may not pass on the rising cost of funds to its customers.

However, the non-banking financial company pointed out that the operating leverage will play a role in mitigating NIM compression. Going ahead, investors will watch the extent to which stronger growth would offset the expected fall in NIM.

The company is expected to benefit from new lending segments such as used-car loans, loan against property, and new auto loans. “These along with leveraging of its Bajaj+ platform will likely support growth, and we see 30% CAGR in AUM over FY23-26," said Jefferies India’s analysts.

The upcoming capital raise should also support Bajaj Finance’s growth momentum. However, competition is rising and could be a dampener for growth. In view of this, some are cautious. As HDFC Securities points out, “We believe that the increasing scale of operations, concomitant with rising competitive intensity, is likely to translate into a slower pace of AUM growth (sub-25%) over the medium term."

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