Whalesbook
Bajaj Finance's Q4 FY26 earnings showcased strong operational performance, highlighted by a significant reduction in provisions and a healthy profit increase. Profit after tax (PAT) jumped 22% year-on-year to ₹5,553 crore, while net interest income (NII) rose 20%. Assets under management (AUM) surpassed ₹5.09 lakh crore, growing 22% year-on-year. This performance was fueled by a significant drop in credit costs, which fell to 1.65% on a net basis for the quarter, down from 2.17% year-on-year. The company projects continued AUM growth of 22-24% in FY27, with targeted credit costs between 1.45-1.60%.
Lower Provisions Boost Profitability
The notable decrease in credit costs and provisions was a key factor behind Bajaj Finance's better-than-expected Q4 FY26 earnings. The annualized net credit cost was around 1.65%, an improvement that contributed to a Return on Assets (RoA) of 4.1% and a Return on Equity (RoE) of 20%. This reduction in provisions reflects improved trends in stage 2 and stage 3 assets, with provision coverage for stage 3 assets at about 60% and for stage 2 assets at approximately 45%. Careful management of portfolios, including winding down captive auto finance and tighter underwriting in MSME, helped improve asset quality metrics and lower provisioning needs. However, the sustainability of such low credit costs needs careful monitoring, particularly as the company expands into segments like gold loans, which may carry different risk profiles.
Portfolio Shifts Drive Growth
Bajaj Finance's AUM growth in Q4 FY26 was mainly driven by mortgages, consumer B2C, rural B2C, and gold loans. Gold loans performed strongly, showing a 115% year-on-year increase and are expected to make up 5% of total AUM by the end of FY27. The company is actively expanding its gold loan network, adding 138 branches in Q4. Concurrently, Bajaj Finance is exiting its captive auto finance business, which saw a 60% year-on-year AUM decline. It is also growing its MSME portfolio cautiously, anticipating a rebound to double-digit growth by Q2 or Q3 FY27. Investments in AI are being accelerated, with plans to deploy over 600 autonomous AI agents in FY27 to boost operational efficiency.
Sector Challenges and Valuation
Despite Bajaj Finance's strong results, the broader non-banking financial company (NBFC) sector is facing challenges. Elevated funding costs, due to potential interest rate changes and regulatory advice to borrow less from banks, could pressure net interest margins (NIMs). Bajaj Finance's NIM moderated slightly by 9 basis points quarter-on-quarter to 9.5% in Q4 FY26, with management expecting only marginal moderation in FY27. The company's premium valuation, with a trailing twelve-month P/E ratio around 30-34x, stands against broader sector concerns and its historical median P/E of 43.19x. Competitors like Cholamandalam Finance reported AUM growth of 20-21% in the same period, indicating competitive intensity. The geopolitical situation in West Asia also remains a factor to monitor, posing potential risks to AUM growth and credit costs.
Risks to Watch
The sharp reduction in credit costs and provisions, while boosting current profits, could potentially mask future issues with loan quality. The company's growing reliance on segments like gold loans, which can be more volatile, requires close examination. Furthermore, the strategic shift away from auto financing toward new growth areas carries inherent execution risks. Rajiv Bajaj is set to retire from the board next year, marking a management transition. The stock has historically reacted variably to earnings. While Bajaj Finance has an ESG rating of 70 from ESG Risk Assessments and Insights Limited, ongoing regulatory developments in the NBFC sector could introduce future compliance and operational hurdles.
Analyst Views and Future Plans
Most analysts remain optimistic. A majority of analysts polled by Bloomberg hold positive stances, with an average one-year target price around ₹1,052.17. Many brokerages maintain 'Buy' ratings, citing the company's strong market position, consistent AUM growth, superior returns compared to peers, and improving operational efficiencies. Target prices range from ₹1,000 to ₹1,210, suggesting potential upside. For FY27, Bajaj Finance projects AUM growth of 22-24%, a slight moderation in net interest margins, an improvement in the cost-to-income ratio by 25-40 basis points, and credit costs within the 1.45-1.60% range. The company also aims to add 15-17 million customers during FY27.