Q1 Results: Mahindra Finance’s Profit Falls Amid Spike In Bad Loans, Provisions
Net profit of the non-bank lender fell 75 percent year-on-year to Rs 68.4 crore.
Mahindra & Mahindra Financial Services Ltd.’s profit for the quarter ended June fell amid a spike in bad loans.
Net profit of Mahindra Finance fell 75 percent year-on-year to Rs 68.4 crore in the June quarter. The company’s gross non-performing assets rose to 7.4 percent in Q1 compared to 5.9 percent in the previous quarter. Its net NPAs rose to 5.7 percent in Q1 compared to 4.9 percent in the last quarter.
This, according to Ramesh Iyer, vice chairman and managing director at Mahindra Finance, will taper off in the latter half of 2019-20. “In Q1 of a financial year, historically if you see, there is always an increase in NPAs, from September onwards the cash flows start improving in the rural economy and peak in Q4,” he told BloombergQuint in an interview.
But Nomura doesn’t expect the company’s asset quality to improve anytime soon. “While historically asset quality has had seasonality, a 30 percent QoQ spike in GNPAs coupled with a worsening economic situation, increasing rural stress and a weaker monsoon lead us to believe that the asset quality improvement cycle has peaked,” the brokerage firm said in a note.
The company’s coverage ratio on Stage 3 NPAs—loans that are more than 90 days overdue—stood at 25 percent in Q1 compared to 19 percent in the previous quarter.
This, according to Morgan Stanley, has been a bit volatile. “Potentially the right metric is total provisions (including Stages 1 & 2) as a proportion of gross Stage 3, which was steady at 46 percent, but we will seek confirmation from management,” it said.
Higher Expected Credit Loss Dents PAT
At a standalone level, Mahindra Finance took impairment of financial instruments worth Rs 620 crore in the June quarter compared to Rs 294 crore in the same period last year. On Stage 3 assets, the bank made an expected credit loss provisioning of Rs 1,316.3 crore in Q1 compared to Rs 780 crore in the previous quarter.
Explaining the rise in expected credit loss provisions, Iyer said under Ind-AS, ECL on an NPA is booked upfront irrespective of the life of the asset. “So, whatever the NPAs are as on June 30, ECL has been provided for, which means if there is no collection on these NPAs in next nine months, there will be no further provisioning required on that asset.”
Weak Business Momentum
On a standalone basis, Mahindra Finance’s loan growth moderated to 21 percent in Q1 from 26 percent in the year-ago period. Operating profit before provisioning grew 2.6 percent year-on-year to Rs 724 crore in the quarter, dragged down by higher operating costs of Rs 560 crore which increased 45 percent on a yearly basis.
Outlook Ahead
According to Iyer, consumers are not adding assets but are making repayments on existing liabilities. An evidence is the collection efficiency which remains intact at 92 percent in the first quarter, he said, adding that the profit numbers will be much better by end of the year.
On Thursday, Mahindra Finance shares rose 0.05 percent to Rs 304.50 apiece on the BSE while the benchmark Sensex shed 0.04 percent to end the day at 37,830.98 points.