Bajaj Finance Limited - Q2 FY'26 Earnings Call Analysis

This report analyzes the Q2 FY'26 earnings conference call of Bajaj Finance Limited (BAF), focusing on key performance indicators and future outlook.

1. Business Growth:

• Assets Under Management (AUM) Growth: AUM grew by 24% YoY to INR 462,261 crores. This indicates robust growth, although the full-year guidance has been revised downwards.
• Growth Drivers: Secular growth across businesses. New lines of businesses (gold loans, new car loans, CV, tractor) contributed 3% to overall AUM growth. MSME growth moderated to 18% due to risk concerns. Captive 2-wheeler and 3-wheeler finance is being phased out.
• Customer Acquisition: Customer franchise expanded to 110.64 million, with 4.13 million new customers added in Q2. Expected to add 16-17 million new customers in FY'26.
• Disbursements: Festive period disbursements were strong, with 7.4 million loans disbursed, a 26% YoY increase. 2.3 million new customers were added during this period.

2. Profitability:

• Net Interest Income (NII): Not explicitly mentioned, but implied to be growing given the AUM growth.
• Net Interest Margin (NIM) / Spreads: NIM came in flat, in line with Q1. This suggests that the company is managing its spreads effectively despite changes in the cost of funds.
• PAT (Profit After Tax): BHFL delivered a PAT growth of 18%. BFSL profits were up by 27%.
• ROA & ROE: ROA and ROE remained steady. BHFL ROA was 2.3%.

3. Asset Quality:

• Gross Stage 3 (GNPA) & Net Stage 3 (NNPA) Assets: GNPA came in at 124 bps and NNPA at 60 bps. The sequential increase in GNPA is attributed to the higher number of days in Q2.
• Credit Costs: Credit costs were elevated in Q2. Full-year credit cost is expected to be at the upper end of the guided range of 1.85% to 1.95%. Significant improvements are expected in FY'27.
• Loan Loss to Average AUF: Came in at 2.05% compared to 2.02% in Q1.
• MSME Asset Quality: MSME business remains under watch, with significant risk actions taken. MSME growth is expected to be 10-12% for the full fiscal year.
• Captive 2-Wheeler Impact: The captive 2- and 3-wheeler business, contributing 1.5% of AUM, accounts for 9% of overall loan losses. Its rundown should improve asset quality.
• Rural B2C & MFI: Management assessment for rural B2C and MFI has improved from yellow to green.

4. Liability & Capital:

• Funding Mix: Deposit book contributes 18% of overall consolidated borrowing and grew by 5% YoY.
• Cost of Funds: Cost of funds improved by 27 bps in Q2 to 7.52%. Expected to be between 7.5% to 7.55% for FY'26.
• Capital Adequacy Ratio (CAR): Not explicitly mentioned, but implied to be healthy given the focus on risk management and sustainable growth.

5. Guidance, Outlook & Targets:

• Management Commentary:
  • Prudent and balanced stance on AUM growth for FY'26.
  • Expects significant improvements in credit costs for FY'27.
  • Consumption patterns look promising.
  • FinAI transformation is central to the long-term vision.

Metric	Target Value	Timeframe
AUM Growth	22-23%	FY'26
Cost of Funds	7.5% to 7.55%	FY'26
MSME Growth	10-12%	Current fiscal year
Gold Loan AUM	INR 16,000 crores	End of FY'26
Gold Loan AUM	INR 27,000-30,000 crores	March '27
Credit Cost	1.85% to 1.95%	FY'26
New Customer Addition	16 to 17 million	FY '26
Opex to NTI	Continued improvement expected due to AI implementation	Not specified

Analysis and Industry Context:

• AUM Growth Revision: The downward revision of AUM growth guidance reflects a cautious approach, particularly in the MSME segment. This is prudent given the current macroeconomic uncertainties and increasing competition in the lending space.
• Asset Quality Concerns: The elevated credit costs and the focus on MSME asset quality highlight the challenges in lending to this segment. The company's proactive measures, including cutting back on MSME lending and restructuring loans, are aimed at mitigating these risks. The phasing out of the captive 2-wheeler portfolio is a positive step towards improving overall asset quality.
• FinAI Transformation: The emphasis on FinAI transformation is a key differentiator for Bajaj Finance. The company's early adoption of technology and its focus on AI-powered solutions can lead to significant cost efficiencies, improved customer experience, and enhanced risk management. The reported benefits from AI voice bots and service bots are encouraging.
• Gold Loan Expansion: The aggressive expansion in the gold loan business is a strategic move to diversify the portfolio and tap into a relatively lower-risk asset class. The company's focus on profitability and ROEs in line with leading competitors is crucial for sustainable growth in this segment.
• Funding Strategy: The measured stance on deposit programs and the focus on cost of funds efficiencies indicate a well-managed liability side. The improvement in the cost of funds is a positive sign for NIM management.
• Overall Outlook: Bajaj Finance appears to be well-positioned for long-term growth, with a diversified portfolio, a strong focus on technology, and a prudent approach to risk management. The company's ability to adapt to changing market conditions and its commitment to sustainable growth are key strengths. The management's emphasis on a "risk-first" approach is reassuring for investors.