Bajaj Finance has enough headroom to withstand moderate downside risks: S&P

Rating agency Standard and Poor’s (S&P) on Friday said that Ltd has sufficient financial headroom to withstand moderate downside risks arising from tough operating conditions over the next 12 months.

The 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. Its tier capital ratio stood at 24.7 per cent as of December 31, 2020.

“Our ratings factor in a potential weakening in asset quality and elevated credit costs, providing a cushion to downside risks,” S&P said in a statement.

BFL’s performance in the Q3FY21 was broadly in line with expectations. Return on average assets (ROAA) fell to 2.9 per cent on an annualised basis for the 9 months ending Dec. 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.

BFL’s performance is expected 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 to 1.6 per cent a year earlier. This level is in the absence of a Supreme Court ruling barring banks and finance from classifying any borrower as a nonperforming asset. Restructured loans formed about 1.4 per cent of BFL’s gross loans.

BFL’s credit costs will stay elevated at about 5 per cent in fiscal 2021 and improve to 2.5-2.7 per cent of total loans in fiscal 2022.

For the 9 months ended Dec. 31, 2020, the company’s credit costs were 4.5 on an annualised basis. Its stage 2 and stage 3 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 Dec. 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 2 and stage 3 loans in this book were a hefty 30 per cent.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Source link