Bajaj Finance: Reflecting The Collective Nervousness Around India’s Credit Cycle

The shares have gone from trading as high as 12-times price-to-book ratio and at an average valuation of 9x P/B, to now trading at 5.5x P/B, close to its lowest valuation of 5.2x P/B, according to Bloomberg data. The valuation is the trailing price-to-book ratio since full financial year earnings are yet to be released.

Shares of Bajaj Finance have fallen 51 percent since the start of 2020, under-performed both the Nifty 50 which is down 23 percent and the sectoral index the NSE Nifty Financial Services which has dropped 33 percent. A bulk of the under-performance has come in the period when markets started to respond to the Covid-19 crisis.

Sanjeev Bajaj, chairman and managing director of Bajaj Finserv declined to comment as the company is in its silent period ahead of its earnings.

Reflective Of A Broader Concern

The change in view on Bajaj Finance, going by its stock price, is interesting. Not so much because it reflects an about-turn for a much-loved and much-owned Indian financial services stock but because of what it tells you about the nervousness around the Indian credit markets.

That nervousness stems from the fact that the fastest growing lending segments—those which banks had ignored and agile non-bank lenders like Bajaj Finance had swooped in to capture—are the very segments that could potentially bring the most pain in the current economic cycle.

Consider the key contributors to Bajaj Finance’s loan book:

• 30 percent of its assets under management came from mortgages;
• 20 percent came from the ‘consumer B2C business’;
• 13 percent comes from the SME business;
• 10 percent comes from B2B sales finance and 9 percent comes from auto finance.

Mortgage Loans

Among these categories, the mortgages portfolio will perhaps be considered relatively safe, since historically default rates on home loans are low.

The Bajaj Finance mortgage portfolio, according to the management commentary, consists of borrowers who are salaried for the last two years with an annual income of Rs 11-13 lakh, the management said in a conference call in April.

Despite lending to the lower income segment, defaults may remain in check if past trends are anything to go by. With the exception of loans under Rs 2 lakh, most home loan categories have shown default rates of 2 percent or below in recent years.

Beyond that category is where the nervousness starts to kick-in.

The Consumer B2C Loans

The consumer B2C business essentially includes personal loans. In the current cycle, where job losses and salary cuts have already begun, there are concerns about an increase in defaults. These loans are mostly unsecured and recoveries could be low if defaults rise.

But not all personal loan portfolios are created equal. The risk of asset quality deterioration lies in the composition of the portfolio.

In its investor call in early April, the management of Bajaj Finance said that 65 percent of its customers have a bureau score of 750 and above. A score of 750 and above is considered good credit. That could help Bajaj Finance tide over this period.

But what about the remaining 35 percent? “The rest have no bureau scores” and “come from markets where bureau hits are low due to low penetration of financial products,” the management said in its analyst call. With no repayment track record, this set of customers would certainly add to the asset quality nervousness.

Another way to slice and dice the personal loan customer base is to look at those that are salaried and those that aren’t. Conventional wisdom suggests that the non-salaried portfolio see a quicker deterioration in asset quality.

Here, too, the Bajaj Finance portfolio is a mix. The non-salaried portfolio is 33-35 percent, the management said.

The SME Loans

The second chunky segment that deserves attention is the SME loan portfolio. Here too, there will be no one-size-fits-all asset quality trend. The size, the business, the linkages to larger corporations will all be factors in deciding how different loan portfolios perform.

Yet, there are some benchmarks that can be useful indicators.

According to the management conference call, the SMEs that Bajaj Finance deals with have a turnover of Rs 5 crore to Rs 16 crore.

This category falls within what is defined by TransUnion CIBIL as ‘medium’ sized enterprises. The default rate in this category was among the highest at 18.1 percent, even before the Covid crisis hit. A further rise in delinquencies in this category cannot be ruled out given the sudden stop in business that most enterprises have faced.

Beyond the immediate concern of asset quality, the question that will emerge for these lenders is how quickly they will be able to return to growth.

Not An Open And Shut Case

While the nervousness around the likely turn in the Indian credit cycle is palpable, the extent of that turn is uncertain.

Any financier you speak to today will point to the fact that the presence of credit bureaus has created a safer lending environment. Equally, a number of other credit scoring and risk management tools used by banks and non-banks have led to better selection of clients.

Maybe they are right. Maybe they aren’t. Let’s face it. At this stage, faced with an unprecedented crisis, no one know the final outcome. But everyone knows that potential risks across some loan portfolios, which looked very manageable a few months ago, now look far more dangerous.

This division of views is reflected in commentary across the financial sector. It is also reflected in the views and price targets on the Bajaj Finance stock.

The lowest target on the stock, by Bernstein, is currently at Rs 1,740. The highest, by Jefferies, is Rs 5,100, as of January 2020. Among the targets updated since April, the highest target is set by HSBC at Rs 3,700.

Overall, the stock has 64.5 percent ‘buy’ calls, 22.6 percent in ‘hold’ calls and 12.9 percent in ‘sell’ calls.

Ira Dugal is Editor - Banking, Finance & Economy at BloombergQuint.