The key highlight of Bajaj Finance April-June quarter earnings is the sharp deterioration in asset quality figures in the auto finance business segment.
The NBFC (non-banking finance company) major reported a 19.15 percent Gross NPAs (non-performing assets) in the first quarter as compared with 9.31 percent in the preceding quarter (ending March 2021) and just 5.8 percent in the corresponding quarter of previous year (ending June 2020). Net NPAs, in the same segment, stood at 12. 18 percent compared with 4.84 percent in the March quarter.
That is a huge jump and is a worrying signal for the overall industry.
Also, the trend mirrors what is happening in the real economy hit hard by COVID-19. Bajaj Finance is a big lender for smaller two-, three-wheeler loans. The asset quality trends in this segment is indicative of what's happening on the ground in the middle-class borrower segment.
But, it isn't only the auto loans, the pressure on asset quality is visible on the small and medium enterprises (SMEs) lending segment as well where the GNPAs have moved up to 2.15 percent from 0.94 percent in the March quarter and Consumer B2C segment--to 2.84 percent from 1.7 percent.
Overall, the gross NPAs have moved up to 2.96 per cent for Bajaj Finance compared with 1.89 per cent in March quarter and just 1.4 per cent in the year-ago quarter.
The provisions, the money set aside against potential losses, jumped to Rs 1,750 crore in Q1, higher by 3.8 percent over Rs 1,686 crore provisions recorded in Q1FY21. The reported NPA numbers are after making the high provisions and partial write offs in the quarter.
A third wave of pandemic and subsequent lockdowns can significantly worsen the NPA worries for Bajaj Finance, analysts said.
"We have been highlighting our concerns over BAF's asset quality trends, along with elevated write-offs (Rs9bn in Q1FY22, Rs20bn in Q4FY21, Rs23.4bn during Q3FY21) and restructured book (Rs12.9bn) placed under stage 2 assets," said Jignesh Shial, Research analyst at Emkay Global, in a note.
"In case of any fresh lockdowns in the wake of the third wave, BAF may see a severe impact on profitability," Shial said.
What is hurting the auto finance book for Bajaj? The auto finance portfolio has grown 11 per cent over the year to Rs11,347 crore as at end June 30, 2021 from Rs 12,802 crore in the year ago period. The main components of growth come from two-wheeler and three wheeler loans. This is possibly where the business has taken the biggest hit, especially three wheelers.
According to the investor presentation, the two-wheeler financing business disbursed 136,000 accounts in Q1, which is a growth of 103 per cent YoY while the three wheeler financing business disbursed 7,700 accounts in the quarter, posting a growth of 31 percent YoY. Analysts point out the likely coming from two wheeler and three-wheeler.
"The auto finance business was affected severely as almost one-fifth of book turned NPAs followed by a surge in slippages in the personal loan segment. BAF maintains Rs4.8bn of management overlay provisions and has guided for overall provisions of Rs42-44bn for the year. However, uncertainties about the third Covid wave persist," Shial of Emkay said.
At the same time, the new business acquisition has continued with the aggressive pace. Total AUM as of 30 June 2021 was at Rs 1,59,057 crore as against Rs 1,38,055 crore as of 30 June 2020. "In absence of a third wave, the Company expects quarterly AUM growth rate for balance of the year to be at pre-COVID levels," Bajaj Finance said.
Question is what happens if the third wave happens and states go back to lockdown, affecting livelihoods and repayment ability of borrowers.
"As expected due to the Covid-19 pandemic there was a deterioration in asset quality during the quarter with GNPA and NNPA deteriorating to 2.96 percent and 1.46 percent from 1.79 per cent and 0.75 per cent in Q4FY21. Overall the company has managed the impact of the second Covid wave very well which was reflected in sequential AUM growth of 4 per cent QoQ," Jyoti Roy, analyst at Angel Broking said.
The rise in Bajaj Finance' Q1 auto finance NPAs could be attributed to COVID-19 which reflects in the two/three wheeler borrower segments. The broader impact on asset quality in the banking sector from the pandemic second wave was quite clear when HDFC Bank reported numbers last week.
The GNPAs of HDFC Bank, at the end of June 30, jumped to 1.47 percent of the gross advances in the first quarter of FY22 against 1.32 percent in Q4 of FY21, while net NPAs jumped to 0.48 percent from 0.40 percent.
The Reserve Bank of India's July edition of Financial Stability Report (FSR) had suggested that banks' GNPA ratio may rise to 9.8 percent in the baseline scenario by March 2022 and can go up to 10.36 percent and 11.22 percent under scenarios of medium and severe stress, respectively. This is actually a better outlook compared with earlier.
"I think the problem is going to continue for most players including Bajaj Finance considering the Covid situation on the ground," said Shial of Emkay. "States like Maharashtra are still under partial lockdown," Shial said.
To sum up, the asset quality trends in the banking sector will be closely linked to how the COVID-19 situation pan out going ahead, despite an improved bad loan outlook from the central bank. And, there is no clarity on the COVID-19 situation yet. Smaller lenders may take a bigger hit on the NPA-front.