Bajaj Finance is sacrificing immediate profits for long-term safety. Will it succeed?
With traditional growth engines beginning to sputter, the lender is betting on a fortress balance sheet to navigate a more crowded and cautious credit market.
Bajaj Finance Ltd’s consolidated profit after tax for the December quarter (Q3FY26) is up 23% year-on-year to ₹5,317 crore if accelerated provisions for expected credit loss (ECL) and exceptional charges due to the new labour codes are kept aside. While these charges are categorized as one-offs, a portion of them could indeed be recurring.
Bajaj Finance recaliberated its loss given default (LGD) policy to be more conservative, resulting in a one-time accelerated provision of ₹1,406 crore for expected credit losses (ECL) in Q3. LGD is an estimate of the eventual loss experienced by a lender after recoveries. The elevated LGD estimate is partially due to excessive consumer leverage or indebtedness, which in turn, is owing to borrowing from multiple lenders.
Management said during the earnings call that competition is now three times what it was before covid, with public-sector banks playing a more active role in retail lending.
By adopting a more conservative LGD policy to 'shockproof' its balance sheet, Bajaj Finance expects its annual credit costs to increase by ₹300-400 crore, management said. In addition, staff costs could increase by ₹100-125 crore due to the new labour codes. Based on Q3FY26’s normalized profit after tax, the overall impact should be a 2-3% drop in quarterly net profit from here.
Bajaj Finance's net interest income grew 20.6% year-on-year to ₹11,318 crore in Q3 with steady margin, almost tracking assets under management (AUM) growth of 22% to ₹4.86 trillion. The cost of funds continued to trend down sequentially, dropping 7 basis points to 7.45% as the benefits of the Reserve Bank of India’s rate cuts trickled in. Fees and commission income (net of payment) grew 15.4%. Operating expenses rose moderately at 11.5%.
Consolidated credit cost dropped sequentially to 1.91% from 2.05% as Bajaj Finance standalone continued recovering from its asset-quality issues in the captive two-wheeler and three-wheeler finance segment. The segment accounted just about 1% of total AUM as of 31 December, but contributed 14% of gross non-performing assets. Despite changes to the LGD policy, management is optimistic of capping credit cost at 1.65-1.75% from next year.
Traditional growth engines sputter
Traditional engines of the loan-book growth – urban business-to-consumer (B2C) loans or personal loans (21% of AUM) and MSME loans (11% of AUM) – clocked a slower pace of growth in Q3. The urban B2C growth rate moderated to 20% from 25% in Q2, and MSME lending increased by 11%, slower than the 18% recorded in Q2.
Meanwhile, the company is rapidly scaling up new segments such as gold loans, commercial vehicle loans and tractor finance. Though they currently account for less than 5% of the loan book, they have the potential to drive growth in the future as strong gold prices could boost lending against gold. There are also signs of growth picking up in the commercial vehicle (CV) cycle, according to management at Tata Motors’ commercial vehicles company.
Bajaj Finance's management will offer FY27 guidance after Q4FY26. Note that the consolidated loan book grew at at 22% in Q3, its slowest pace in 11 quarters. Analysts are broadly factoring in slightly higher compound annual growth in earnings per share (EPS) over FY26-28. Still, the stock trades at 20 times estimates FY28 EPS, based on Bloomberg consensus, which isn't cheap, especially given management’s admission of rising competition.
While Bajaj Finance could still grow its loan book by 20% annually by capitalizing on its wide geographic presence, the main is question whether it can do this while maintaining healthy asset quality.
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