Bajaj Finance Vs HDB Financial: Who Weathered The Pandemic Better?

The once-in-a-lifetime Covid-19 pandemic took a toll on jobs and incomes of consumers, raising concerns about the impact this would have on the loan books of retail lenders.

Two large consumer lenders — Bajaj Finance Ltd. and HDB Financial Ltd, a subsidiary of HDFC Bank Ltd. — have shown a rise in stressed loans while also slowing growth to deal with the increased risk in consumer lending.

For the quarter ended December, Bajaj Finance reported a 29% drop in net profit to Rs 1,146 crore. HDB Financial reported a post-tax loss at Rs 44.3 crore compared with a profit of Rs 216.7 crore a year ago.

To be sure, the full impact of the crisis is yet to reveal itself. The Reserve Bank of India first offered a moratorium on loans between March and August and then permitted banks to restructure debt without downgrading asset classification.

Still, the December-quarter earnings of Bajaj Finance and HDB Financial give a hint of the stress. Who withstood the pressure better?

Gross Bad Loans

Going by headline gross non-performing assets, Bajaj Finance has seen a smaller rise in bad loans than HDB Financial.

Bajaj Finance reported a gross NPAs of 0.55% of the loan book or about Rs 789 crore. This number, however, would have been at 2.86% or Rs 4,105 crore if the Supreme Court had not put a standstill on the classification of bad loans after Aug. 31.

The analyst presentation said the auto finance business had a gross NPA ratio of 11.54% as on Dec. 31 compared with 4.45% as on Sept. 30 and 5.89% a year ago. Other segments such as rural B2C and consumer B2C businesses were also large contributors to the bad loans.

HDB Financial reported a gross NPA ratio of 2.7%. But if the lender had followed the usual asset classification protocol, without the Supreme Court’s directions, the bad loan ratio would have been at 5.9%, it disclosed.

Stress Beyond Gross NPAs

Bajaj Finance provided more granular details of asset quality, suggesting stress beyond the gross NPA pool. HDB Financial, which is not a listed entity, did not provide these details.

For instance:

Bajaj Finance wrote off Rs 1,970 crore worth bad loans during the quarter by fully providing against them. According to managing director Rajeev Jain, these were loans where the recovery potential was below 10%.
Bajaj Finance also restructured loans worth Rs 2,400 crore under the RBI’s one-time provision.

This would bring the total pool of stressed assets on Bajaj Finance’s book at Rs 8,475 crore or 5.9% of the assets under management.

HDB Financial did not release the proportion of restructured assets or any write-offs it may have taken during the October-December quarter.

In a report released on Thursday, Bernstein Research said it is revising its credit cost estimates for Bajaj Finance downward owing to better than expected asset quality numbers. Still, stress could continue to emerge.

“The management has guided to normalise credit costs for FY22/23. However, we believe there could be delayed delinquencies from stress cases and flexi-loan buckets. We estimate credit costs for FY22/23 at 260/200 basis points,” the Bernstein report said.

Flexi-loan is a category where Bajaj Finance and its borrowers have greater control over the repayment period and amount. According to the Bernstein report, 31% of Bajaj Finance’s assets under management consist of flexi-loans.

Bajaj Finance’s performance though may not be worse than that of HDB Financial.

Gautam Chhugani, director (financials and fintech) at Bernstein, said, “If we were to add any potential restructuring or write-offs to HDB Financial’s numbers, its asset quality picture would likely worsen.”

“But even in the normal course of business HDB Financial’s credit cost numbers are double of what Bajaj Finance reports. Considering the risk profiles of each of their customers, it would not be an apple to apple comparison,” he said.

Provisions And Credit Costs

During the October-December quarter, HDB Financial set aside Rs 800 crore for provisions against loan losses, Srinivasan Vaidyanathan, chief financial officer at HDFC Bank, said. It had set aside Rs 300 crore in provisions the previous quarter.

No benefit of standstill is taken in the profit and loss statement as adequate general provisions have been made, Vaidyanathan told analysts over a call last week.

Bajaj Finance set aside Rs 1,352 crore as provision in the third quarter. It also held Rs 800 crore worth floating provisions on its book for future use. In the quarter ended September, the lender had set aside Rs 1,700 crore in provisions, after the Rs 2,973 crore in the April-June period.

Loan Growth

As risk across consumer lending rose, Bajaj Finance and HDB Financial slowed loan growth.

Going into the crisis, at the end of the quarter ended March 2020, Bajaj Finance had assets under management of Rs 1.47 lakh crore, which fell to Rs 1.38 lakh crore in the April-June period. Since then the lender’s AUM has stabilised at Rs 1.43 lakh crore. In commentary accompanying the earnings release, Bajaj Finance said AUM growth is back across all segments except auto finance.

In the case of HDB Financial, the asset book has remained stagnant at close to Rs 60,000 crore.

Siddharth Purohit of SMC Global said in both cases the current performance would affect future prospects.

“As an analyst, it is difficult to take a liberal view on the earnings reported by both Bajaj Finance and HDB Financial. Looking at the current stressed asset portfolios, it is likely that both lenders will not be able to replicate the previous growth trends. Moreover, worries about future stress continue to remain,” said Purohit.