Bajaj Finance Limited (BAJFINANCE) Earnings Call Transcript & Summary

Thank you. Ladies and gentlemen, good evening, and welcome to the Bajaj Finance Limited Q4 FY '25 Earnings Call hosted by Morgan Stanley. This event is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley disclosure website at www.morganstanley.com/researchdisclosures. Please note that this call and your questions will be recorded and may in certain circumstances be distributed to clients and/or made publicly available. By participating in this event, you consent to such recording, distribution and publication. [Operator Instructions] I will now hand the conference over to Mr. Subramanian Iyer from Morgan Stanley. Thank you, and over to you, sir.

Thank you, Kenneth. Good evening, everyone. This is Subramanian Iyer from Morgan Stanley. Thank you very much for joining us for the Bajaj Finance Q4 FY '25 Earnings Call. To discuss the results, I'm pleased to welcome Mr. Rajeev Jain, Vice Chairman; Mr. Anup Saha, Managing Director; Mr. Sandeep Jain, CEO and CFO; and other senior members of the management team. On behalf of Morgan Stanley, I thank Bajaj Finance management for giving us the opportunity to host you. I now invite Rajeev to take us through the key financial highlights for the quarter, post which we will open the floor for Q&A. Over to you, Rajeev.

Thank you, Subbu. Thank you, Morgan Stanley, for hosting us. I have my colleagues here. I have lots to cover. I'll try and cover in the next 15, 20 minutes. I'll refer to the investor deck, which has been uploaded on the Bajaj Finance website. So let's just jump in. I'm on Panel 4, if I take a quarter view, in general, I would say, a good quarter on volumes, AUM, OpEx and freight costs. PBT excluding the additional ECL provision, which I'll cover a little bit in detail in further slides for the additional ECL provision that we have taken for annual model redevelopment was up 18%. ROA and ROE was steady, in line with the last three quarters. AUM growth came in at INR 18,618 crores to INR 4,16,661 crores. We booked a record 10.7 million loans in Q4 and added 4.7 million new customers. Customer franchise stood at -- just tad below 102 million. And Bajaj Finserv app now crossed 70 million customers and has 70.5 million customers. The FINAI transformation, which we talked about is progressing well, and I'll provide some update on that as well. AUM grew 26%. OpEx to NIM for the quarter came in at 33.1%, continues to -- continue its downward trajectory, which will continue in the next year as well. PBT came in -- the PBT growth, there are two one-timers, which I'm covering in a little bit of detail. So PBT came in a growth of 11% at INR 5,647 crores. PAT came in at a growth of 19%, and I'll give you the reconciliation for both these numbers in two slides later. PAT came in at INR 4,546 crores, a growth of 19%. ROE came in at 19.1% versus a year ago of 20.5% and net NPA came in at 44 basis points. Over to -- let's just now cover the one timers. There are two one-timers in Q4. In Q4, company annually conducts and conducted again the refresh of its ECL model, which principally incorporates the last 12 months portfolio performance and forward-looking macro outlook. Given the higher flow forward rates that we have actually seen through the year and elevated credit costs in the last three quarters, the redevelopment of the ECL model resulted in an additional ECL provision of INR 359 crores. And it's primarily rather mostly in stage 1 assets. So that's one impact to -- in the P&L in the credit cost line. The second impact is in the PAT line, which is that the company has revaluated income tax position on deductibility of certain expenditures based on favorable court and tribunal orders in recent years. And accordingly, in the process, the company reversed INR 249 crores in tax expenses from previous years and INR 99 crores from the current year, resulting in an overall tax reduction of INR 348 crores in Q4. So if you look at the table below, I'm on Panel 5 you principally see that expected credit loss reported is INR 2,329 crores, which on a percentage of average basis 2.33, adjusted for the onetime ECL impact is INR 1,970 crores and is 1.97%. PBT is INR 5,647 crores, which is 11% growth. But adjusted number for the ECL is actually -- which is one time -- for the quarter is really 11% but I'm just giving you a directional input, it's up 18%. And PAT is up -- reported is 19%, but it's actually up 17%. So these are the two one-timers: one in the credit cost line, other in the in the tax line. That's one update to provide. There are a set of three corporate actions that the Board has taken today. The Board of Directors today have recommended subject to shareholders' approval, of course, the following corporate actions. One is subdivision of face value of shares from INR 2 to INR 1, so we're doing a split. And the Board of Directors also recommended 4 fully paid bonus shares for every 1 fully paid equity shares of the company. So it's virtually the 1:10 impact on the -- number of shares and per share. The Board directors subject to shareholders' approval. So that's one action or rather two actions recommended by the board and subject to shareholders' approval. Point number two is subject to shareholders' approval, a final dividend of INR 44 per equity share has been recommended, amounts to 18.88% of stand-alone profit, excluding the exceptional gain, As you would recall, we had an exceptional gain on account of dilution in BHFL on account of its listing. Excluding that exceptional gain, the Board has recommended a adjusted tad below 19% of -- which is really in line with our long-term dividend payout policy, 19% dividend payout for the current year. Point number three, the Board of Directors today have approved distribution of a special interim dividend of INR 12 per equity share from the exceptional gain, which the company -- which resulted from the sale of investments in BHFL on account of IPO listing in September '24. These are three large actions. And the bonus and special interim dividend principally reflect the strong financial position your company is in the robust results and positive growth outlook. And we do want to -- since investors are on the call, I do want to acknowledge and express gratitude to all the investors and shareholders for their continued and unwavering trust and support. So these are three/four actions, corporate actions being recommended. The third one is not a recommendation, the first two are recommendation. Third one is within the ambit of the board to make a decision. Let's quickly go to some financial data. AUM, we talked about AUM growth we talked about, new loans we talked about. 4.7 million loans for the quarter, we talked about customer franchise, we talked about the -- in terms of geographic footprint, the company is now mostly done with the geographic footprint. That's why if you could see, we added only four new locations, where addition is happening is in gold loan and MFI branches. The company opened 137 stand-alone gold loan branches in the quarter that went by and added 30 MFI branches. Overall, Gold loan branches are now 964 and MFI branches around 333. Liquidity profile, given the rally in the treasury market, we've been adding a lot of long-term -- long-term borrowing to our overall borrowing program stood at INR 18,754 crores. Cost of funds came in at 7.99%, a marginal increase of 3 basis points. Overall, from a direction standpoint, we expect cost of funds to gradually go down to 7.75% to 7.85% by end of FY '26. Anup will cover this point in a little good more detail when we provide management assessment for FY '26. Overall deposits book grew by 19%. And on a consolidated basis came in at 20% for the fiscal March '25. In terms of -- I'm on Panel 8. NIM grew 22%, net total income grew 23%, OpEx -- improved to 33.1%. Employee headcount stood at 64,000 people. Attrition rate came in at 16.8% for the year, marginally higher than last year. One important update to provide, which is point number 14, which is that the company onboarded 44,500 people from outsourced manpower to a fixed-term contract employment model in certain of our businesses. We principally see that this action should lead to improvement in productivity and should also enhance our customer service standards. Let me now cover the important line item, which is credit costs. Loan loss and provisions, as I earlier said, was INR 2,329 crores, we made an additional provision of INR 359 crores on account of model redevelopment and primarily it went to stage 1 assets. Adjusted for this, loan loss was INR 1,970 crores and would come in at 1.97%. In Q4, the net increase in stage 2 and stage 3 assets, which are constantly going down. If we actually map it over the last four quarters, stage 2 and stage 3 assets are constantly going down, came down to INR 289 crores. Stage 2 increased by INR 784 crores and stage 3 decreased by INR 495 crores. So even if you just look at this metric, you can -- we can say that there is some level of improvement on an ongoing basis, but right now for a real time. GMPA, NNPA came in at 96 basis points and 44 basis points against 85 basis points and 37 basis points continues to be among the lowest in the industry. Profitability. Consolidated pre-provision profit grew 24%. PBT and PAT I've already talked about. ROA came in at 4.6%. ROE came in at 19.1%, and capital adequacy is pretty strong at point at 21.93 of the Tier 1, which was 21.09. S&P has upgraded the company's stand-alone outlook to BBB minus positive from BBB minus stable. Just a small update that -- okay. BFS, which had warrants which were maturing has exercised the option and that money has come into the company. Just some additional updates. In terms of managing -- senior management personnel appointments, to -- last year, we started the process of Anup moving as the MD and three of our senior officers moved as Chief Operating Officers. In line with that direction, we've also taken a decision to create three new positions given the growth and complexity of the firm. We've created three new Deputy CEO positions. They will also report to Anup. Manish Jain, who runs our B2B business, is being promoted to Deputy CEO; Sidhant Dadwal who runs our B2C and SME business is being promoted to Deputy CEO; and Harjeet who runs our Bharat Lending, MFI and Strategic Partnerships business is being elevated to strategic -- to Deputy CEO. All of them will see expanded responsibilities, which are outlined here. As a result of this change, we'll principally have a management council, which will have a seven-member team, three Chief Operating Officers and three Deputy CEOs who would help navigate the company and take it to greater heights. Just to the last point, which is that company in the fourth quarter -- in the quarter gone by, took a 12% stake in a company called Protectt.ai, investing INR 65 crores. It's a 5-year-old company, and it's a cybersecurity product company. And we are amongst the large customer of theirs and it specializes in mobile app security solutions, it would help us strengthen the company's technology, road map and cybersecurity space. So that's the final thing. Q4 BHFL very quickly, you would already be aware, very good quarter for BHFL on AUM profit and asset quality. AUM grew 26%, GNPA came it at 29 basis points. The PAT grew by 54% and ROA came in at 2.4%. So a very good quarter for BHFL. Where PBC stood at 63.28% against the regulatory requirement of 60%. So on all metrics, they had a very good quarter. Their AUM came at -- just a tad below INR 115,000 crores OpEx to NIM continues to go down. PBT grew 48%. They had a similar benefit in PBT and PAT on account of the deductibility of certain expenditures. So there is some impact benefit here as well in PBT to PAT. PAT grew by 54% and ROE came in at 12.1%, and net NPA was 11 basis points. For Fintech, good quarter for MTF, AUM, PBT, PAT and new customer additions. They delivered an overall MTF AUM of INR 4,505 crores and added 71,000 customers in the current quarter. overall franchise just stood at tad below 1 million customers. And MDF AUM grew by 18%, total income grew 107% and PBT grew by -- albeit on a small base, grew to 77% to INR 46 crores and PAT grew by 64% to INR 36 crores. Overall franchise stood at tad below 1 million customers grew by 40% year-on-year. Quickly on FY '25, while you know it, I'll just cover one panel. I would call overall FY '25 is a mixed year for us as a firm, good year on volumes, AUM growth, customer acquisition, operating efficiencies and pre-provisioning profit, elevated credit costs resulted in subdued profit growth. And that's why it is a mixture. All the way up to credit cost, it's a good story, including the credit cost it's a mixed year story, and we hope to change that as we get into FY '26. On a full year basis, if you look at it, AUM, I've talked about, OpEx to NIM overall came in at 33.2%, PBT came in at INR 22,080 crores, a growth of 14%. PAT grew by 16% to INR 16,779 crores, ROE came in at 19.2%, and net NPA came in at 44 basis points. Last year, we started to provide a management assessment of what we see the year to be. At this juncture, I would just hand over to take you through FY '25 management assessment and FY '26 management assessment for BFL.

Thank you, Rajeev. Anup here. As Rajeev called out, we have put up the management assessment last year. And as a management, we say what we do and what do what we say this is the report card of our management assessment. The company delivered on its FY '25 assessment on customer franchise, AUM growth, OpEx to NPI, ROA, GNPA and NNPA. Credit cost was a clear miss as per our assessment, the company took significant credit action to FY '25 and is optimistic about its impact for P&L FY '26. The company also saw margin compression of 49 bps versus the assessment we have given of 30 to 40 bps due to delay in interest rate cuts as compared to the internal projection. As a result, the profit growth was subdued. If you move to the next slide, in a way, we have called out all the metrics we spoke about. In terms of customer acquisition, we came 12 million to 14 million. We had called out we did about 18.18 million that came strong, that's a green. AUM growth 26% to 28%, we came at 26%, that's a green. Net interest margin, which I called out that in a way, a red 49 bps in terms of the delayed rate cut. OpEx to NPI, we called out as 20 to 40 bps. We actually delivered 80 bps. I think that's significant progress there, and I will talk about it as we get to FY '26 on the specific metric. Credit cost, we said 175 to 185, this is where we are not happy about it, that's 2.07%. This is excluding the ECL cost. So to that -- 2.07%. Profitability, we had just said that it will be cautiously optimistic. It came at 16%. So that's the red. ROA, 4.6% to 4.8%. We remain in that corridor 4.6% and ROE to remain subdue due to surplus capital that came at 19.1%, that's a green. So ROA is green, ROE is green. GNPA, we said less than 1.2%, came at 0.96% that's a green. Net NPA less than 0.4% came at 0.44%, that's a green. But we are in a business of credit. So we miss credit, we don't like it. Moving to next slide. This is essentially the management assessment we are providing for FY '26. The customer franchise, we remain confident to add 14 million to 16 million customers in FY '26. The AUM growth estimates of AUM remain at 24% to 25%, aided by new lines of businesses launched in last two to three years. Net interest margin, the company has moderated pricing in select unsecured businesses. Cost of fund is estimated to go down by 10 to 15 bps in FY '26. Overall, we estimate NIM to remain stable in FY '26. Fees and other income, the company has moderated its fees and charges and stopped it co-branded cards business. The company estimates its fee and charges to grow by 13% to 15% in FY '26. OpEx to NTI is estimated to improve by 40 to 50 bps from our current level. And some of that, we are talking about our AI progress. Our credit costs for FY '26, the company estimates the loan loss to average AUF in the corridor of 1.85% to 1.95%. Profitability, the company is optimistic from last year where we called out as cautiously optimistic, we are changing it to optimistic about profit growth in FY '26. Return on asset is estimated to be in the range of 4.4 to 4.6 in. Return on equity, given excess capital, ROE metric is estimated to be between 19% to 20% for FY '26. Gross NPA, net NPA is estimated to remain lower than long-term guidance. In AI, we had called this out in our LRS and the company will deploy AI use cases across revenue, cost customer engagement, underwriting, productivity and controllership, the company estimates to deploy about 100 AI applications in FY '26, and we remain committed to the plan.

We can probably just go quickly to -- we want to cover -- thanks Anup, I just want to cover -- go to guiding, long term. Just two, three changes that you made before we open up for questions. I'm on Panel 33, there's a change here. So it's important I anchor that. The only change you principally see here is return on assets, which used to be 4.6% to 4.8%. We are creating a little wider ROA range of 4.3% to 4.7%. And ROE from a long-term guidance standpoint pre-COVID were 19% to 21%. We went up to 21% to 23%, and we think this is one of the last remaining residues of COVID that we think on a long-term basis will compound between 19% and 21%. So these are two changes from 4.6% to 4.8% versus 4.3% to 4.7% and 21% to 23% to 19% to 21%. This is a long-term/medium-term guidance. We find there is improvement. We will update that to the investors as well. I think that's mostly just quickly on to GNPA, NNPA, the provisioning panel rest of the panels are routine in nature. Cross-sell franchise continues to move strongly. It's at 64.45 million. That's on Panel 57, 63.3% of the customers on an aggregate basis, we think our cross-sell level. So the opportunity remains very, very large. The PPC remains pretty strong. Just the last panel I'll cover on provisioning. I'm in Panel 65. Across portfolio as a moment on a year-on-year basis that you principally see the largest movement is in 2-wheeler and 3-wheeler finance. But partially, we ignore that because the portfolio is winding down, majority of the portfolio belongs to our previous captive financing business, and that's in a wind-up mode, that will fully wind down by March, June '26. Otherwise, on a year-on-year basis, you see some level of movements here, 57 basis points, 59 basis points in GNPA for urban sales finance. Urban B2C loans, 1.03% to 1.17% and so on and so forth. So that you see marginal movement between on a year-on-year basis and adding up to aggregate number being 85 basis points GNPA to 96 basis points and similar aggregate movements you see in NNPA from 37 to 44 basis points. That's really all we had shared, lots of change, lots of -- and we are well into the new year. Happy to answer questions. I just want to make one point before I open it up questions, that from next quarter onwards, Anup, as a Managing Director will do the investor call. I'll, of course, always be there to assist him, but we will take places from Q1 onwards.

[Operator Instructions] We will now take our first question from Chintan Joshi from Autonomous.

I wanted to start with Panel 24. Thank you for Panel 23 and 24. It's great to see that you are constantly judging yourselves against what you expect. If I could go into a little bit more detail for FY '26 starting with AUM and then following on into NIM. On AUM, if you give us a refresh of where do you think growth will be easier to find and where growth will be challenging to find over FY '26, that would be helpful. And on NIM, quick data keeping, what is the exact NIM reported NIM for the current quarter? And why should we not expect some NIM expansion with falling rates, that's what we would typically expect of you. What's different this time around?

Yes. So one is on AUM another is on NIM.

Yes. This is Anup here. I think at an overall level, we remain very small. As we call out our aggregate market share is only 2.14% of India's total credit. If I look at from a count share, that number goes to about 7%, 7.5%. Across all businesses of ours other than the B2B business, where we have a 54% plus market share, our market share remains small. So as we plan to grow, I think the growth will come across all businesses. In addition to that, we are seeing very good business growth in some of our new businesses. in terms of the secured business as we started in the last few years. We are seeing very robust growth in gold loan business. So in totality, as we look at growth, we want to ensure that we operate in the corridor of what we have led to in terms of all products and relative market share, I think, allows us to continue to grow. Our franchise addition this year also came at about 17 million, 18 million. As long as we continue to grow our new franchise. And as long as we continue to stay on our acquired and cross-sell frame, I think growth is reasonably there. Coming to your second point on NIM, why should it not increase, I think we called out a couple of points, we did some moderation in terms of certain specific unsecured businesses, which has -- in terms of NIM, there has been some compression, which we called out. But at the same time, we believe the cost of fund benefit for the full year, we would get about 10 to 15 bps benefit on that. Net-net, we anticipate that our overall NIM will remain stable. That's the position at this stage in terms of NIM compression. If cost of fund goes down much more than what we have planned in our current scheme of things. This can show some improvement. But our current assessment, it will remain stable...

Are you saying that you're going a little conservative on the cost of funds? Are you saying you're being a little conservative out here? Or is this fair?

I mean, probably conservative to the extent of 5, 7 basis points just to be fair, in all candor. But it's not like it will be instead of 10, 15, it could be 30, 40 basis because we -- let me just step back and make a point that we are very clear that liquidity risk is not a risk that we take -- so we lock in long-term liabilities as and when we can. So I think that while it protects and strengthens the overall balance sheet, also takes longer to pass through. So I think that's just one added point I want to make. We are confident of 10 to 15 basis points. It could go to 20, 25 basis points, but that's the farthest. But important one what I want to make, which is written in a panel there is that -- is point number 3 -- 4, sorry, that on fees and other income, we have moderated our fees and charges. And that's why you see the growth is forecast to be 13% to 15% here versus 25% -- 24% to 25% growth. This has a little higher impact than even the cost of fund impact. It's important I make that point or land that point to be clear. So -- but it's done in the interest of sustainability and longevity of the business, and we think it's the right thing to do. And that's why we've taken this action.

And I understand that this question...

And the reported NIM number?

Yes, just one second. I understand that this question of cost of fund will come from other guys as well. So let me give some more texture. I think in terms of overall mix of borrowings, about 75% of borrowings are fixed rate borrowings between FDs and NCDs that we raise that's about 75% borrowing. They are typically longer tenure of money that we are locked in, repricing will take time. It will happen slowly and gradually. Bank money, we are hoping should get repriced much more quickly. Incrementally, have started seeing benefit in terms of NCD rate and CP rate? the answer is yes. We have seen softening in NC rate by about 40, 45 basis points in the last about 30 days, CP have also improved about 70, 80 basis points in the last 30 days. So things are moving in right direction. RBI s also taking lots of actions in terms of ensuring abundant liquidiy. We remain watchful of the situation. Idea is to lock in as much we can lock in to reduce burn rate in times to come. That is the important point that Rajeev was calling of liquidity risk management. As a result, we have taken a conservative number, I would say, 5, 10 basis point could still accrue to us if the environment continues to remain the way it is today.

And the reported NIM number? Just for data keeping?

We don't specifically report NIM number. But let me tell you that the quarter four NIM number is, in fact, lower than the full year NIM number for FY '25, which means, as Anup made a point NIM to be stable in FY '26. There is some catch-up that to happen in the next year. So that's the only point that I would put on the table.

But we are confident we'll catch up just to make the last point.

Thank you. We will now take our second question from Abhishek Murarka from HSBC.

So my question is on this ECL model refresh. What kind of history do you take? Do you take 5 years, 6 years? And why has there been additional provision. So is it that FY '21 or '22, which were -- or '20 and '21, which were higher credit costs, those have got added. And next year's refresh will probably see some exclusion there. So if you can give some sense, that will be useful?

It's a fair question. Abhishek, ECL, as you would know, is a complicated modeling process. Stage 1 typically look at 12 months' performance and 12 months forward-looking view in terms of provisioning. As Rajeev was communicating as part of opening remarks, we have seen elevated credit cost in the last three quarters, particularly. Quarter 4 last year was okay, quarter 1, quarter 2, quarter 3 was elevated credit costs. As we ingest this information into the ECL model building, ECL model assumes that the past is reflection of future. As a result, it throws up a higher number of -- higher amount of provisioning requirements for stage 1. Your point is correct. If things were to improve in FY '26, should one expect releases to come in future? Answer is yes. But as far as the [indiscernible] processing, we do look at this information, point number one. Point number two, we do look at longer-term information, which is 5, 7, 8-year horizon, information, mainly for the purpose of stage 2 stage 3, which is for evaluating PD, LGDs and EADs for those portfolios. As you would notice, stage 2 has seen a marginal increase in the coverage ratio. That probably is an indication of recent litigation that everyone has witnessed. That's point number two. Point number three, stage 3 seems to be holding up quite well because stage 3 only is one element, which is LGD because the customer has gone into delinquency, PD and EAD is almost -- already 100%. The only element that can move is LGD. Given that, we look at longer-term averages for casting the LGD number, it has not shown any kind of significant worsening. As a result, stage 3 continues to hold well. 1 and 2 is where we have to do catch-up, more catch-up in stage 1 than stage 2. Aggregate standard asset provision as a result, which used to be 69 basis points until last quarter, has gone up to 77 basis points. If you were to do a math, a majority of the provisioning impact is coming in stage 1 itself.

Right. So basically, for stage 1 and stage 2, you have taken so -- especially stage 1, you have taken a shorter period. So last three quarters impact is what is getting projected forward, If I have to understand it.

Yes. The bias is more of last one year performance in building the stage 1 provision.

I think other point is we do an annual refresh of the model to that extent, a catch-up.

And if I were to do -- if I were to do theoretical discussion, Abhishek, this could be a situation for considering underlay, but as a prudent management, prudent company who would not discuss about underdays, As a result, we have allowed the model to flow higher provisioning for stage 1. We are more than happy to consume it in the current quarter.

Okay. Understood. And if I back calculate your write-off works out to around INR 1,700 crores. Is that correct for the quarter? Ballpark?

That number is not necessarily correct. My calculation says that the number is INR 2,100 crores for the quarter.

Okay, 2,100. Okay. All right. And just finally, some commentary on growth in rural B2C and some of the -- yes, basically rural B2C how do you see that? I think in the 2Q call, you had said that things go fine for the next couple of quarters, then that portfolio could probably grow at 20%, 25% in FY '26. So do you see that kind of outlook now? And are you comfortable in that segment going forward?

Let me just provide one view on that. I think that's an important input and then Anup will give view on FY '26. As we did the redevelopment of the models, in fact, the rural personal loan business didn't require any additional provisioning because as we have started seeing some worsening in the portfolio in the last year which is FY '24, the catch-up provisioning was already taken in FY '24 itself. So the entire impact of INR 359 crores that we're discussing has no contribution coming from a rural business, just to place it for ease of reference, and Anup will give guidance on FY '26.

So we had called out the rural B2C business, 2 years back is to grow at about 5%. We did see some stress in the portfolio due to series of actions which came down to about 5% growth rate. From there on, it has started growing back very nicely. What the other thing we are seeing is the early vintage, 3 MOB, 6 MOB and rural B2C is improving. As Sandeep spoke about even the ECL, that is also clearly calling out. We remain very confident from here to grow the rural B2C business. We also significantly strengthened our debt management capability in rural. And as I say, the point around the risk -- risk point of rural B2C growing back all over again. It is also backed by our rural B2B business remained very, very rock solid during the period. So our incremental customer base there has grown. So that gives us a fair bit of confidence on growing rural B2B from here on.

Just one added point that Anup made, I would like to reinforce that principally across the firm, there are only three key metrics from a risk standpoint that we are really looking for apart from every other metric is how is the book -- color of the book change, that how is 3 months on books, 6 months on books, 9 months on books and 12 months on books changing because we are a fast-churning book. The BFL stand-alone book churns in 18, 19 months, okay? That's really been the -- that's how the book churns. As long as the 3 MOB, 6 MOB and 9 MOB and 12 MOB change, which we are watching since August, September very closely. And the metric that we're looking at is pre-COVID. In certain instances, lower than pre-COVID. So it's just a matter of churning the book and we should look at some time in the current fiscal losses to be significantly lower. So I thought since Anup made a point on vintage metrics, I'll just anchor that point.

Sure. I'd also like to congratulate Manish, Sidhant and Harjeet for their appointment as Deputy CEOs. Congratulations.

We will now have our next question from Kunal Shah from Citigroup. [Operator Instructions]

The question on growth, particularly 24% to 25-odd percent. It seems like some change in stance till last time we were pretty confident of achieving the long-term guidance of 25% plus. So no doubt, I think you indicated in terms of customer franchise, new businesses, but then why, particularly like 24%, 25% growth for the next year, which are the segments where in you expect some kind of a pullback on the growth side?

On a lighter way, I'll just make a point at [ 420,000 ], 25% growth will mean -- INR 120,000 crore addition [Foreign Language] INR 105,000 crores net addition. I think it'll be for the first time, will cross INR 100,000 net addition in a -- but I'll let Anup answer rest of the...

So I think the point around growth...

We are still small in terms of the market share.

Agree. Yes, yes. good point.

Yes. So you said like it's still 2.14, which gives you more confidence.

No, no. I think the point around we still remain very small in terms of our contribution to the overall credit. At a design level, we grow at about 2x of nominal GDP and about 2x of the growth of the industry. But for us, very clearly, if I have to make a choice between growth, credit and profitability, we are a risk business. So the point we are not happy with this year, as we called out that credit did not play out to our appetite. So our core objective at this stage is first to get to the credit cost corridor, which we have laid out to that. The early vintages are looking good. We have significantly fortified our debt management capability. We get there first. I think that's the first thing. Once we get there, we are not saying will not grow. We see opportunity. We will seize it. We're also utilizing this time as we called out the FINAI strategy is to significantly get operating leverage in terms of our cost structures, because I think that's very important to reshape the P&L that focus on the cost-to-income ratio bring it down, Do the transformation between the thin components of it and the AI component and then the restack the growth because with those metrics, the growth would look a little very different than in the current. So I think stay with the credit first get the OpEx to NPI, sharpen through AI transformation. And we see growth, we will take it. So we -- I think that's the stand we are taking. Is that a little different than -- but as Rajeev said, at this size, 25% is definitely looks to be a rightful long-term sustainable growth.

Okay. Got it. And if I just can squeeze in one more question...

Sorry, sorry. We get credit and control, as Anup said, I mean, there's sufficient capital sufficient liquidity we are fully diversified book. We have lots of new businesses. So at one level, I agree, opportunities outweigh risk to the 24%, 25% growth. But I think as Anup said, we are a credit business, we want to make sure credit first and then growth. And we'll pick that. We are pretty confident of that. It's just a matter of quarter here or quarter there.

Yes. So when you -- so when you give the credit cost guidance of 1.85% to 1.95%, you still believe it is relatively higher to grow at more than 25-odd percent? Or is it like the pool in stage 2, which has got increased in this quarter, that's something which is worrying you in terms of particular rise in seasonally strong Q4. Is that the reason?

Yes. The book has to turn fully, Kunal. That's point number one. I mean I would foresee that by third or fourth quarter, we should be lower than -- I would forecast in a reasonable manner lower than our pre-COVID level. So that's unless and until something dramatically changes in the macro environment over which we have limited control. Otherwise, I foresee third and the fourth quarter, the number should look lower than on our pre-COVID numbers.

On credit cost?

Yes, yes. On credit cost. Take that as an assessment at this point in time and we'll go with the flow.

And as we make the point, a couple of points you already spoke about unsecured this set of actions, even the 3PL actions, which we have taken in the last few quarters, we are now back to pre-COVID level on 3PL, which used to -- which had gone up to 12%, is back to 6%, 7% in rural, it is down to 2.5%, 3%. So tremendous actions, those are showing benefits. The other is 2-wheeler, 3-wheeler, which is the captive business because we stopped incremental doing business, it's a winding down book. If you look at the credit cost, the large part of the credit cost was sitting there. The incremental 2-wheeler business, open architecture, the texture of that business is very different. It's half the losses because it's a mix of bikes and scooters and 50% of that is scooters.

We have our next question from Viral Shah from IIFL Securities.

Rajeev, just two questions. I would say, one, when I look at the asset quality panels on the page 6, 9 onwards, right, In all the panels, the amber sign remains where it is in the previous quarter. And when I see, say, the stage 2 and the stage 3, that has been kind of still inching up. So basically, what gives us this confidence that say, next year, it's going to be much better. Apart from the fact that maybe there may be some ECL release, as you mentioned, towards the end of the year. Is there the early trends that you are seeing? If you can give some bit more color on that?

I didn't say ECL release, I said if things will be improved significantly, maybe the model can show ECL release number as well. That's not certain. The model has to show that number in the next year as we deliver FY '26, so that's not the one. Do you have a point on this, Rajeev?

So look, principally, what gives us confidence is what are the early vintages saying? We churn, as I said, the book is 18, 19 months. We have 7, 8 months into the tightening that we started to do 3 MOB, 6 MOB, 9 MOB are beginning to look. We don't have 12 MOB because we started to take actions from August. We still don't have 12 MOB. Those are being tightened to levels, as I said, across the board, across portfolios to levels lower than even pre-COVID. So that's really what is giving us the confidence. And what is giving us a confidence means I am very confident because it's structurally lower or better customer that we are acquiring now. And the leverage levels of those customers are significantly lower. So it's just -- so that's what is giving us the confidence. That's why as I said I'll connect this do to earlier point at Kunal was asking that as we get that into control, maybe the growth could be higher. So -- but this is the priority at this point in time, which is credit.

And if you look at our current year in terms of loan loss to average AR. There's one point. If you look at current year from loan loss to average AR, as Rajeev called out 2.07% is the number for full year. Quarter 4 actually came at 197 existing for that additional provision on ECL model development. It came in at 197. That's one good sign that we're seeing that after some quarters -- a few quarters, we have started seeing the numbers go down. That's point number one. Point number two, the major issue that we faced, and that's true for the industry as well, in general, is across unsecured businesses, more personal loan than anything else. The auto finance business is 2-wheeler, 3-wheeler financing business, which is in rundown mode for us. Used car financing, we have significant actions we have taken. I think we have discussed that in the previous calls as well that nearly 1/3 of the business we had let go in the used car financing business to keep portfolio under control. The kind of action that we have taken in terms of repermitting the PLCS business, both rural, urban increasing the affordability of EMI for the customer, lowering the ticket size, and other actions across -- all the exposures -- lowering exposure for customers, 30% should definitely have a bearing in terms of how we get the credit outcome for the next year. That's just the additional point.

Very clear. And Sandeep one more for you. So when you say that the NIMs are going to be kind of stable, you highlighted the point that the exit quarter NIMs were materially lower, and on a Y-o-Y basis, when I look at next year, we will also have the hit from the Bajaj Housing kind of portfolio flowing through at a consol level. So on a Y-o-Y basis, are we confident that the NIMs will be flat?

Yes. So I did make a point saying that if 10, 15 basis points of cost of an improvement comes through, we should be able to maintain NIM at the current level. If it doesn't flow through or the flow through is higher, the numbers can be marginally plus and minus. At this point in time, the bias is towards more benefit in terms of cost of fund given the kind of improvements that we have seen in the money market for us and for the industry as well. So keeping that view in mind, it's more of positive bias at this point in time, but we'll see quarters at a time.

And just a clarification, the rate -- the cost of fund benefit that you are guiding for, you're assuming what 75 basis points of rate cuts or 100 basis points?

So I'm looking at current cost of fund environment where the yields have come down considerably between -- in the last 30 days across NCDs as well as commercial paper market. Commercial paper contribution though is low. I think that's the only thing that I'm considering at this point in time. I'm assuming that the liquidity environment will remain positive, which is where I think RBI has been taking lots of actions in the last couple of months. Keeping that in mind, there is a positive burst towards cost of funds.

No. But we -- since February, which is when our planning cycle happens, we baked in so far 3 rate cuts. Now if it's higher to the earlier point, depending on which way the economy is headed, and depending on the actions by Reserve Bank. We have so far baked in front-loaded rate cuts to June.

We will now take our next question from Kuntal Shah from Oaklane Capital.

When I look at consol long-term guidance you gave last quarter and this quarter, AUM growth remains same, profit growth remains same, GNPA, NNPA, everything, all corridors remain same. So how do you internalize ROA corridor widening and return on equity corridor widening? Because even if you account for dilution of Bajaj Housing Finance, INR 14,000-odd crores, how do you explain this?

Yes. So Kuntal, if you look at the current year's ROA, it has the range between 4.5% to 4.6%. So the 4.3% to 4.7% corridor does articulate that very clearly. That's point number one. In terms of ROE, we are mindful of the fact that in the last almost more than a year now, we have been sitting on surplus or additional capital. We did a QIP of nearly INR 10,000 crores. We had inflows that came in of INR 6,500 crores on listing of BHFL on consol basis. We are mindful of the fact that surplus capital does put pressure on ROE, and this is for that, the number would look a little better. But keeping that in mind for the medium term basis, the guidance is 19% to 21% kind of ROE. And the immediate next year view is -- is the 19% to 20% kind of corridor, which I think Anup highlighted during his assessment for FY '26.

And Kuntal [indiscernible] over the next 2 years -- sorry, over the next 2 years, we still have to bring us take down from a regulatory requirement standpoint down to 75% in BHFL.

That will bring more capital.

Yes, that will create more capital. So that's why we thought it will be prudent on our part to outline to shareholders that as a result of significantly surplus capital, we foresee long-term guidance to change from [ 21, 22 to 19, 21 ]. And to the point -- and we've done the math, if you knock off on both sides, the excess capital and excess and the cost of interest because interest comes as raw material in our business, that number would probably be 60, 70 basis on -- 70 to 90 basis points. So I mean, knock on both sides, take their excess capital to take its cost away -- and we would see instead of 19.1% and 19.7%, 19.8% ROE.

But any plan to use this excess capital?

Sorry.

Any plans to use this excess capital?

Plans, principally, I mean we are -- we generally like to build businesses that are orientation as a firm. We continue to remain organic in nature, but we continue to explore. Unfortunately, even as we explore when -- as operating managers, we come to a conclusion that if we can take 3 years to build that size of business why not build. So the bias remains towards building than buying. So unless and until an event happens, which we will announce to the investors before we do it, I would say, organic is our way to build business. Of course, we're giving dividend today. So I think that's another way to improve ROE. But that's on the exceptional gain, but just in a lighter way.

We will now take our last question from Avinash Singh from Emkay Global.

Just again, going back to the credit cost on guidance, that is 1.85% to 1.95%, slightly higher than what you had initially guided for FY '25. Considering the fact if I look versus pre-COVID, I mean, you have a material composition coming from BHFL or mortgage that kind of very low credit cost. So if there is kind of in this 5 years, the structural shift that would be as you go more and more to grow your customer franchisees somewhere there is a kind of you're going down the credit growth. What's happening here? I mean, despite, I mean, mortgages nearly reaching 30% of your AUM, the credit cost, what was the pre-COVID level vis a vis now what you are kind of forecasting that's on the higher side. So adjusted for that -- adjusted for the mortgage probably is materially higher. So what is explaining sort of that position?

I just want to correct you that consol basis, even if you look at 5 years ago, mortgages was 31% of the book, even today it's 31% of the book. Actually, you would find that over 5 years, and going back to earlier question that people were asking and then we were saying that opportunity remains very large, which is true that all lines of our businesses have continued to compound at the same level. So just to correct that, even '19, '20, I distinctly remember number 31% mortgages well. Today also, it's at 31.1%. So mix has not moved much at all actually. I just want to make the point, and then I'll hand it over Anup to add to it.

No, I think as Rajeev clearly called out, you are calling out number for a full year basis, we do believe we are still not fully out of the woods in terms of certain businesses like urban personal loan because the early vintages are showing fine, but we still have a portfolio which has to mature the earlier portfolio. So that's one part of it. I think the second, as we continue to act on it. The numbers -- the second half of the year, we believe, will come in much better than the full year average what we have called out. So in a way, it's a gradual quarter-on-quarter, we'll see the benefits which will start coming in. In terms of mix change, we are not expected to dramatically change the mix at all because what we have called out even in our LRS, the segment mix, which we run between various businesses at most can ship 1%, 1.5% sideways. So that's not going to change that. So I think the other big thing which I also called out is the captive 2-wheeler and 3-wheeler as that book starts winding down, you will start seeing benefits of that because we did see elevated credit cost in some of those portfolios as well.

And it used to be 5% of the book and 12%, 14% of the credit cost, structurally over years. And that book is in a wind down mode very clearly down to INR 10,000 crores now from INR 17,000 crores a year ago?

12,000 crores down to 4,500 crores.

And it'll go down to -- INR 4,500 crores by March '26. So the captive book. So that's one big change that will happen, and it's accretive from a credit cost standpoint.

Thank you That was the last question we can take today. And I would now like to hand the conference over to Mr. Subramanian Iyer for any closing remarks. Thank you.

Thank you Rajeev, Anup, Sandeep and Bajaj Finance team. Rajeev, Anup do you want to make any closing comments?

No. we've answered all the questions. Thank you so much for listening in.

Thank you.

Thank you, Subbu. Thank you Morgan Stanley.

Thank you. On behalf of Morgan Stanley, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.