Cost to income continues to fall (-93 bps y-o-y, 33.9%) and was lower than JEFe 34.3% in Q3.
Q3 PAT grew 52% y-o-y to `16.1 bn, 5% beat vs. JEFe as stronger NII, lower opex more than offset higher provision. GNPA was stable q-o-q. Consumption slowdown has weighed on loan growth, but growth has been resilient, aided by diversified book. NIM should expand given easing funding cost. Credit cost has likely peaked and should ease. Opex ratios could continue to drift lower given multiple cost levers. We lift our estimates. Retain Buy with revised price target of `5,100.
Loan growth moderates to 34% y-o-y
Consumer durable/digital product growth slowed sharply to 7% (19% y-o-y Q2) due to slowdown in consumption, but a diversified book and strong growth in other segments helped BAF deliver strong loan growth. Intent to purchase by consumers was down meaningfully in Q3 (based on search trends), but there is some uptick in Jan, per BAF. BAF has added ~182 new locations (cities) in Q3. Loan growth should pick up when environment improves, given BAF’s strong/deep distribution and cross-selling ability. We forecast BAF loan book to grow at 31.7% in FY20 (32% CAGR over FY20-22e).
NIMs surprise positively again
3Q NIM rose to 10.7% (89 bps q-o-q, 20 bps y-o-y) vs. our 10% est due to a) better yields (+37 bps y-o-y); (b) lower borrowing costs (-9 bps q-o-q) and (c) lower leverage due to recent capital raise. NIMs should expand further given (a) lower marginal funding cost; (b) full benefit of recent capital raise. Lower CP mix (2% vs. 8% in Q2) following recent capital raise, has created a drag on overall funding costs (12-14 bps), which could fade in FY21.
Opex levers visible
Cost to income continues to fall (-93 bps y-o-y, 33.9%) and was lower than JEFe 34.3% in Q3. We expect costs to continue to surprise on the downside as BAF has multiple cost levers and due to leverage benefits.
Stable asset quality
Q3 GNPA was flat q-o-q at 1.61%. Karvy (`3.03 bn) not yet recognised as GNPA. GNPA in segments ex autos was down q-o-q. Metrics were stable in consumer durable, personal loan cross-sell, salaried personal loans. 30+ dpd assets rose 86 bps q-o-q in autos, 54 bps in LAP and lifestyle segments, but improved in digital products.
Q3 credit cost rises 60 bps q-o-q to 2.46%
Accelerated provisioning related to Karvy (`850 mn) and Cafe Coffee Day (`150 mn, exposure `910 mn) accounted for 30 bps rise q-o-q. Stage 1 & 2 credit cost rose 20 bps q-o-q owing to rise in 30 dpd assets. BAF expects resolution of CCD in 30 days. It expects to take a view on Karvy exposure by end March, which may affect provisions in Q4. Underlying credit cost has peaked and should decline going forward as per mgmt. We forecast credit cost of 2.01% in FY20 and 1.75% in FY21.
Lift FY20-21e EPS 2-5%
We trim loan growth marginally, factor in better NIM and lower Opex. Our RI based PT edges up to `5,100 (from `4,750) implying 7.4x FY21e BV and 34x FY21e EPS.