BAF has a shot at being first NBFC to launch credit card, if RBI approves. This would enable Bajaj Finance (BAF) to take product to deeper markets as against the Top-100 towns where it sells cards of RBL Bank/DBS Bank and where majority of players operate. If it achieves 20-40% cross-sell to nondelinquent client base of 40m and even at lower transaction values, it could make `9-17bn in profit in three years. This is 5-10% of FY25E profit & would add growth drivers. Hold stays.
BAF can leverage existing franchise to build on own card biz: If BAF gets approval to foray here, it would be able to leverage its network of +3,500 branches, 140k merchant relationships and 60m customers to ramp-up. Today it procures credit card customers for RBL Bank and DBS Bank with 3m clients right now; these are mostly in top-100 cities . Hence, an in-house credit card programme can expand opportunity set to deeper markets where BAF is already present.
Credit card market would add new leg of profit pool: The current credit card partnerships for BAF are primarily sourcing arrangements and it doesn’t get upsides from growth in transactions and revolver/EMI products. BAF will need to invest in platform building, expand partnerships, spend on reward programmes and design products for a wider- et of retail customers & corporates. Its biggest challenge would be the absence of bank-type customer relationships among deposit clients and corporates. This would keep its ROA lower than SBI Cards/mature banks in this segment.
Sizing the opportunity: While BAF is targeting to double loans in three years, approval to roll out credit card will add profitable product to the suite. With 60m customers of which 40m aren’t delinquent, if it can cross-sell cards to 20-40% of non-delinquent users and with 40% lower transaction value & loan/ card, it could do `170-350bn in loans. At 5% ROA, it could drive `9-17bn in profit which would be 5-10% of our FY25 estimate and could be a long-term growth driver for BAF.
Growth to support valuation premiums: BAF continues to deliver stronger than peer-group growth as well as profitability. Moreover, even if there is some moderation in NIMs due to rise in funding costs, it could get compensated by potential for operating efficiencies. These would support its premium valuations. We raise earnings marginally & see 28% CAGR in profit over FY23-25 (FY23 should grow fast on low base) and maintain our Hold rating with PT of `8,000 (earlier `7300) based on 7.2x Jun-24E adjusted price-to-book (PB) ratio.