Release Date: January 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Mahindra & Mahindra Financial Services Ltd (BOM:532720, Financial) reported a YoY loan book growth of 25.5%, reaching INR 97,048 crores.
- The company maintained its leadership position in key segments such as tractors, preowned vehicles, passenger vehicles, and the three-wheeler segment.
- Net Interest Margins (NIMs) improved by 30 basis points QoQ, now standing at 6.8%.
- Gross Stage 3 (GS3) asset quality improved, reducing from 4.3% to 4% QoQ.
- The company has seen a significant decline in credit costs, from 2.4% in Q2 to 1.2% in Q3, indicating better asset quality management.
Negative Points
- The overall Profit After Tax (PAT) for the quarter saw a slight decline of 12%, standing at INR 553 crores.
- NIMs are 90 basis points lower compared to the previous year, largely due to the rising cost of funds.
- The tractor segment experienced a QoQ de-growth of 18%, reflecting industry-wide challenges.
- The SME business showed a QoQ and YTD de-growth, attributed to a strategic shift towards more granular retail business.
- The company's coverage ratio remains high at 63%, which is driven by the ECL model and may indicate higher-than-expected loss given default (LGD) ratios.
Q & A Highlights
Q: Do we really need a cover of 63%? Where do you see it settling in the next one to two years? And you talked about recalibration of provisions product-wise, could you elaborate, please?
A: The current coverage ratio is largely model-driven. We have an ECL model that determines the coverage ratio. Compared to peers, we might be higher, but this is a function of LGD and PD. We expect this to come down by Q3 of next year. The recalibration mentioned was on NIMs, not provisions.
Q: Can you give us some outlook on how the funding outlook is there for Q4 and the next year? And also, what it implies for NIM?
A: The overall liquidity environment has remained tight, but availability of funding hasn't been an issue given our credit rating. Costs have remained elevated, and we expect the incremental cost of borrowing in Q4 to remain at the same level as Q3. The timing of rate reductions is uncertain.
Q: Are the peak investments behind on the tech side? How do we see the trajectory on the OpEx to asset side from here?
A: Our attempt is to keep OpEx at the same level. Investments are happening, but we aim to be as frugal and efficient as possible. We are maximizing on all fronts and aim to keep OpEx at 2.8% right now, with a goal of 2.5% in the medium term.
Q: What are the levers to achieve the 2.5% ROA target for the next year?
A: We aim to push the income side slightly higher, focusing on non-interest income sources. The other big lever will be credit cost, which we aim to keep in the 1% to 1.5% range. This will be achieved sequentially, and we are trending well towards this goal.
Q: Can you comment on vehicle finance disbursement growth outlook?
A: For passenger vehicles, we expect sub-10% growth going forward. Used vehicle finance has room for growth. CV business is strong, and we hope to ride that momentum. Tractor demand is expected to be stressed. Three-wheelers are seeing a 30%-plus growth, especially in the EV segment.
Q: How should we think about the revised targets for GNPL? Can we see it going down to 2.5%-3% like some of your peers?
A: We don't want to give forward guidance, but to achieve a 1% to 1.5% credit cost, GS3 numbers will have to come down. We will provide more granularity on our forward plans in our next meet.
Q: What percentage of our bank borrowings are repo-linked? Is there scope to further reduce liquidity on the balance sheet to support margin?
A: About 40% of our total borrowing is floating rate, which includes MCLR. We continuously recalibrate our liquidity buffer to minimize negative carry.
Q: What is the incremental cost of funds on bank borrowings?
A: The overall cost of funds is about 7.8%, and the incremental cost of funds is in the ballpark of 8%. We expect the incremental cost of funds to remain at the same level as Q3 in the immediate future.
Q: Can you quantify what proportion of your book is now repriced to the higher rate?
A: We don't go that granular, but we have been steadily increasing our fee-based income and have taken marginal rate hikes.
Q: What is the GNPL as per RBI norms?
A: It's about 5.5%.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
