Mumbai: Why do investors prize Bajaj Finance more than the country’s largest lender State Bank of India (SBI) when the former is just a fraction of the size of the latter?
This week, the nimble consumer lender’s market capitalisation surpassed that of the banking giant. Note that SBI has a balance sheet size of ₹22.4 trillion, about 14 times the size of Bajaj Finance’s book.
But what use is size, if it doesn’t result in greater profits? Investors love profits and a company that dishes profits every year with a promise of more will enjoy investor love.
In FY19, Bajaj Finance generated a net profit of ₹3,995 crore, far higher than SBI’s ₹862 crore. SBI suffered in that year simply because its bad loans ate up much of the profits. In the first quarter of FY20, the company reported a net profit of ₹1,195 crore, while SBI’s was ₹2,312 crore.
Besides, the fact remains that growth prospects at Bajaj Finance look better. The latter has less of a problem recovering loans. In the coming quarters, SBI will have to set aside more profits towards bad loans, something which Bajaj Finance needn’t do.
SBI’s book is dominated by corporate loans, which also means that in times of stress, the bank will face exponential increase in delinquencies compared with others simply because of the size of its exposures.
Investors were reminded this week that further stress on SBI’s book is imminent considering it has exposure to some troubled non-bank finance companies.
Bajaj Finance, on the other hand, is no troubled NBFC. It has a business model that rests on making individuals take equate monthly instalments to fund their desires and lifestyle purchases. Considering that India’s households are net savers with low leverage, the company stands to benefit from the sheer potential of growth in retail loans.
No wonder Bajaj Finance adds millions of new consumers to its business every year while SBI’s growth cannot match that of the consumer lender.
Analysts at Jeffries India Pvt Ltd said that Bajaj Finance could report 30% loan growth on a compounded annual growth basis for FY19-21 period. “Given its high pre-tax return on assets, we expect Bajaj Finance could see a 280-300 basis points return on equity boost (if it retains the gains), which supports a higher sustainable growth rate (without external capital) in the longer term," the firm said in a note.
SBI, on the other hand, faces higher provisioning and lower loan growth. But there is no denying that at a multiple of 7 times its estimated book value for FY21, Bajaj Finance valuations are stretched.
In contrast, SBI trades at a discount to its FY21 estimated book value. SBI may be a tired elephant but it is in no way giving up the race. With the bank consciously de-risking its balance sheet, valuations could see a relook.