Bajaj Finance can absorb a surge in provisions: S&P

Singapore, January 22 : Bajaj Finance Ltd (BFL) has sufficient financial headroom to withstand moderate downside risks over the next 12 months from tough operating conditions, according to S&P Global Ratings.
"Our ratings on BFL reflect the company's comfortable capital levels, strong market position in consumer durables and two- and three-wheeler financing, and adequate liquidity," it said.
"Our ratings factor in a potential weakening in asset quality and elevated credit costs, providing a cushion to downside risks."
BFL's performance in the third quarter of fiscal 2021 (ending March 31, 2021) was broadly in line with expectations. Return on average assets (ROAA) fell to 2.9 per cent on an annualised basis for the nine months ending December 31, 2020 from 4.5 per cent in the same period last year.
The sharp dip in ROAA was due to lower business volumes, pressure on its margins and a sharp rise in credit costs.
"We expect BFL's performance to remain better than the industry average. The company's non-performing loan ratio stood at 2.9 per cent as of December 31, 2020 compared with 1.6 per cent a year earlier," said S&P.
This level is in the absence of a Supreme Court ruling barring banks and finance companies from classifying any borrower as a non-performing asset. Restructured loans formed about 1.4 per cent of BFL's gross loans.
S&P forecast BFL's credit costs will stay elevated at about 5 per cent in fiscal 2021 and improve to 2.5 to 2.7 per cent of total loans in fiscal 2022.
For the nine months ended December 31, 2020, the company's credit costs were 4.5 per cent on an annualised basis. Its stage two and stage three loans stood at 7 per cent.
This is an improvement from 9.3 per cent in the previous quarter but it remains significantly higher than 4.2 per cent as of December 31, 2019. A large part of the improvement was driven by the company's aggressive write-off strategy, leading to higher credit costs.
BFL's higher than peers' credit costs are mainly due to its sizable exposure to high-risk, high-yield segments such as consumer durables, two- and three-wheelers, and unsecured personal and business loans.
The company's auto finance business remains the worst hit and is likely to take longer to return to pre-Covid levels, given depressed collateral values. The stage two and stage three loans in this book were a hefty 30 per cent.
"In our opinion, BFL has ample capital buffers, as reflected in its tier-1 ratio of 24.7 per cent as of December 31, 2020. Its strong capitalisation is supported by good profitability and low dividend payouts."