PremiumConsumer lender Bajaj Finance Ltd has brought some relief, as its early update for the June quarter showed that the second wave of the covid pandemic has impacted loan demand less than originally feared.
Bajaj Finance added 4.6 million new loans in the June quarter, 15% less than the previous quarter. The lender witnessed a drop in new customers on a sequential basis.
Notwithstanding this fall, its assets under management (AUM) showed a healthy 3% quarter-on-quarter growth. Investors took note of this, and the share price gained more than 2% on Tuesday.
In early June, the lender had said that the impact from the second wave would be milder, but had also indicated that investors may need to temper their expectations on growth. Following the resurgence in infections in April-May, most states had gone under lockdowns, restricting activity. Ergo, concerns that loan growth would be hampered yet again had begun to grow. These concerns are now getting allayed.
Bajaj Finance’s encouraging metrics for the June quarter joined similar updates by HDFC Bank and AU Small Finance Bank. Other lenders such as Federal Bank, too, have shown resilience in growth. Unlike Bajaj Finance’s growth in AUM, most banks reported a sequential contraction in their retail loan book. This perhaps shows that the company has managed to grab market share in consumer loans.
The company’s performance has rubbed off on others as well. Shares of most lenders rose on Tuesday on hopes that the impact of the second wave will be limited. Both the Nifty Bank and Nifty Financial Services indices gained nearly 1%, despite the broader market closing in the red.
Of course, the year-on-year growth in AUM was a sharp 15% for the company, mainly due to a low base. Recall that last year, a nationwide lockdown had severely restricted activity beyond the bare minimum. Lending during the first quarter of FY20 had nearly collapsed due to the lockdown. Ergo, year-on-year growth numbers are largely an optical relief. In comparison to last year, the curbs this time around were milder, which explains the lower contraction in Bajaj Finance’s loan accretion.
With growth concerns allayed, investors would now want to be reassured on asset quality as well. As of March, the lender’s bad loans were 1.79% of its total loan book. The company has ₹840 crore provisioning specifically towards pandemic-related risks. In June, it indicated that credit costs will increase due to the second wave. It had also said collections had dropped and bounce rates had shown an increase. The lender has not given an update on its asset quality this time.
“By the look of the collections and the guidance on credit costs, there could be some trouble on asset quality. A good set of numbers here would make valuations look less daunting," said an analyst, requesting anonymity.
In light of the risks to asset quality, the company’s valuations appear lofty. Shares have gained 20% since April and trade at a rich multiple of eight times its estimated book value for FY22. In comparison, the largest private sector lender, HDFC Bank’s shares trade at a modest three times estimated book value. Bajaj Finance has so far escaped a deep scar on its asset quality despite the pandemic. Sustaining this would be a sure way to garner investor interest.
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