Earnings for the quarter across banks, NBFCs, capital market players and insurance were stable and less worrisome. Banks: Loan growth was at ~15% yoy (adjusted for merger), NIM was stable qoq with cost of funds peaking for most players and slippages showed no worrisome trends barring in unsecured loans such as personal, credit cards and MFI.
Less worrisome even as some stress is emerging at the fringes
Banks under coverage delivered ~15% yoy earnings growth led by ~10% yoy growth in operating profits and a similar growth in revenues. Note that the base impact for the sector aggregates is still favorable on account of: (1) merged financials in the case of HDFC Bank and AU SFB and (2) high provisions for bipartite settlement in the past year for PSU banks. We had largely unchanged trends on operating performance with (1) loan growth steady at ~15% yoy (adjusted for the merger), (2) NIM was stable qoq and seems to be near peak level, (3) slippages had a few seasonal items but showed no material rise in overall levels, and (4) recovery trends are still holding up well for public banks. Some early signs of rising stress in unsecured loans (personal loans, credit cards and microfinance) appear to be the only key headwind in an otherwise stable lending period as deposits remain a key focus area for private banks. We prefer to own the frontline banks at this stage.
NBFCs: A noisy quarter, underlying trends remain monitorable
NBFCs under coverage continued to report strong loan growth with some moderation in disbursements. Asset quality trends were nearly stable albeit some rise in delinquencies, which may be in line with seasonal trends. NIM compression may be coming closer to an end. In the midst of mixed asset quality trends in the sector, HFCs and gold loans are favored segments; Shriram Finance, Muthoot, LICHF, Aavas and Home First are preferred over the rest.
Capital markets: Stronger quarter for AMCs and RTAs
AMCs reported a sequentially stronger quarter led by stronger markets and steady net inflows in equity. AUM growth to revenue growth translation was on expected lines. Revenue yields were supported by stronger equity mix and, in general, were ahead of estimates. RTAs reported stronger non-mutual fund revenue growth. 360 One also reported a strong earnings quarter, helped by higher transactional income. All companies benefitted from strong other income due to treasury/MTM gains. CRISIL and ICRA reported relatively muted results.
Banks: Another stable quarter
Asset quality: NPL ratios remained stable despite rising concerns on unsecured loans
1QFY25 was another quarter where asset quality for banks continued to improve. The proportion of delinquent loans on the balance sheet continued to decline. The stock of NPLs has been steadily coming down sequentially for PSU banks (see Exhibit 8). Even non-NPL stress book (restructured advances) has been broadly under control and not a source of worry.
Gross slippages for the sector continued to be in control with some seasonal slippages in 1Q led by the agri portfolios of various banks. While there is a growing concern about delinquencies in unsecured retail loans, overall stress formation for the system is still limited. Slippages for frontline banks are near or even below pre-Covid levels. Banks with a higher exposure to unsecured retail loans (especially the microfinance portfolio for many of the SFBs) saw an increase in slippages during the quarter. Some of the PSU banks (especially BOB and SBI) reported an increase in NPA levels in their personal loans (unsecured) portfolio. However, at the overall level, we are still not worried about asset quality for the banking system in the medium term, unless there is a sharp macroeconomic downturn-a relatively low probability event in our view. We expect incremental slippages to sustain at similar level.
At the same time, recoveries and upgradations continued to be healthy, resulting in a simultaneous write-back of provisions as well. Many banks (especially PSU banks) have been offering various settlement schemes to delinquent customers in order to resolve legacy stress on the balance sheet. Most banks have been opportunistically making higher provisions for legacy stress (to reduce net NPA) during the current benign asset quality period. This can result in a lower requirement for provisions in subsequent quarters. However, note that the pool of gross NPA itself is gradually declining (see Exhibits 6 and 7) which implies that bad loan recoveries (and, hence, provision reversals) are also likely to decline steadily.
There is some uncertainty today about the impact from migration to the new ECL regime and impact from provisions for project finance exposures (based on recent draft circular published by the RBI). However, we do not see any immediate reason to change our view on asset quality or credit cost for the banking system. We believe that we are in a period where slippages and credit cost for the banking system are unlikely to increase sharply in a short period of time. Nevertheless, we remain watchful about how the situation evolves.
Along with recoveries from GNPA, PSU banks are also seeing healthy recoveries from written-off accounts, which are reported under the revenue line (non-interest income or interest income). This is discussed in a subsequent section of the report.
Credit growth is quite broad-based; stood at ~20% yoy for banks under coverage
For banks under coverage, credit growth stayed healthy at ~20% yoy in 1QFY25 (supported by the merger of HDFC Bank with HDFC Ltd) - down marginally from ~21% yoy at the end of previous quarter. Growth was strong for private banks (~29% yoy) and healthy for PSU (~14% yoy) banks. As per the latest RBI data, overall credit growth for the banking system has stayed healthy at ~14% yoy in July 2024.
Growth in loans to large corporates continues to be modest at 7% yoy in June 2024. The MSME industry segment has been seeing robust credit growth over the past few quarters, but growth has moderated now to ~11% yoy. Retail credit growth has stayed healthy at ~26% yoy (17% yoy adjusted for HDFC Ltd merger), with housing credit up ~36% yoy (~18% yoy, adjusted) and vehicle loans up ~15% yoy. Credit card balance growth has also stayed strong at 23% yoy, whereas loans against gold jewelry were up 30% yoy.
We saw credit growth staying broad-based during 1QFY25. While the frontline private banks continued on a robust growth trajectory, even some large PSU banks showed healthy growth of 14-16% yoy. At the same time, some of the regional private banks reported strong credit growth. Segmental credit growth data reported by individual banks also indicates that credit growth has been relatively more broad-based across sectors of retail, MSME and large corporate, but being led by retail. We expect retail and MSME to continue to drive growth going forward as well.
NIM was broadly flat or marginally lower qoq for most banks
We saw banks showing a flat or marginal decline on NIM during 1QFY25. Yields were broadly flat qoq. At the same time, re-pricing of term deposits seems to be in its last leg now, although a shift in deposit mix away from CASA continues to push up cost of deposits for most banks. Further increase in cost of deposits is expected to be low, resulting in limited further contraction in NIM till the interest rate cycle reverses.
At a system level, deposit growth stood at ~11% yoy. Thus, deposit growth continues to be outpaced by credit growth at 14% yoy. We note that most PSU banks stand with relatively lower CD ratio and, hence, better positioned on the liquidity front.
As per the latest data from RBI, term deposit rates were up by ~190 bps to ~6.9% from the bottom of ~5.0%. Both private and PSU banks have hiked their term deposit rates meaningfully over the past year, but we have not seen many hikes in recent months. Wholesale deposit cost (as measured by CD rates) have now broadly stabilized.
Healthy trends in non-interest income; recoveries from TWO pool supported profitability
Most banks reported a decline in treasury income during 1QFY25. This was mainly due to the shift to the new investment valuation norms which require a part of treasury-related income to be booked under interest income and some part to be booked directly to reserve rather than through revenues. Fee income growth was also healthy for the quarter given the business momentum. At the same time, recoveries from written-off accounts remained strong for select PSU banks thereby supporting profitability. Similarly, card spends have been on a steady growth path, which also supported fee income growth for card issuers.
Operating expenses: High base of bipartite-related provisions for PSU banks
Most banks reported low to modest growth in operating expenses during 1QFY25. PSU banks have seen inflated staff expenses in the past few quarters led by the completion of catch-up provisions for the 12th bipartite settlement. However, these provisions were not required in 1QFY25 as the provision cycle is largely complete and, hence, operating expenses grew slower yoy for most PSU banks.
NBFCs: A noisy quarter, underlying trends remain monitorable
NBFCs under coverage continued to report strong loan growth with some moderation in disbursements. Asset quality trends were nearly stable albeit some rise in delinquencies, which may be in line with seasonal trends. NIM compression may be coming closer to end. In the midst of mixed asset quality trends in the sector, HFCs and gold loans are favored segments; Shriram Finance, Muthoot, LICHF, Aavas and Home First are preferred over the rest.
Noise on asset quality trends dominated the quarter
After about three years of steady asset quality performance, 1QFY25 saw some trends of rising early delinquencies. Select pockets of stress in unsecured loans that have been in discussion since last year and delinquencies observed in microfinance have raised anxieties on asset quality trends elsewhere in the sector. Most players cited heat wave and election for rise in delinquencies. It will be interesting to see how these trends playout over the next few months. The focus is shifting from unsecured loans to secured loans with unconfirmed fund deployment like top up and LAP.
Three segments up 25% yoy
Exhibit 2 (reflect select large players) shows that three segment i.e. diversified NBFCs, vehicle finance NBFCs and MFIs were up 25% yoy in 1QFY25. While diversified players were fastest growing last year, growth has moderated likely due to slowdown in unsecured loans and rundown of gold loans by IIFL. Microfinance also seems to be moderating a bit. Vehicle finance continue to hold on to about 25% loan growth, apart from Shriram Finance, loan growth is moderating for all other players.
Earnings growth remains strong, driven by loan growth
Most NBFCs reported 15-37% earnings growth reflecting strong underlying loan growth; exceptions were LICHF (large NIM compression and low loan growth) and SBFC/India Shelter. YoY growth remains strong at 22-36% (except LICHF). Decline in disbursements reflects impact of shift to RTGS. NIM compressed 11-40 bps for most players reflecting 10-30 bps increase in cost of funds for most and decline in yields by 10-30 bps. Stressed loans decline qoq for most players.
Disbursements take a bit of knock
Most housing finance and business loan companies reported weak disbursement due to change in norms for reckoning disbursement on RTGS basis versus practice of reckoning disbursements on cheque issuance. Loan approval activity has been strong and hence we expect this to catch up in July. Most companies have already migrated to RTGS.
Getting close to end of margin compression cycle
Most NBFC stable of marginal qoq NIM compression. While rate hikes are near fully transmitted, increase in borrowing reflects refinancing of older, lower cost borrowings or diversification of borrowing away from banks and NHB. Interestingly, we have seen yield compression in select companies- this reflects change in business mix and/or rate negotiation of old home loan customers at lower rates. While bond markets have rallied recently and we expect policy rate cuts in next few quarters, NIM of HFCs/vehicle NBFCs are at cyclical lows and companies have started to pass on rate hike; three HFCs have recently raised benchmark lending rates to support their margins.
Remain watchful and assertive
We remain assertive on NBFCs, keeping an eye on developing asset quality trends. In this backdrop, we believe that housing finance and gold loans are best asset classes. We remain assertive on the affordable HFC with Aavas and Home First as most favored picks. We continue to like Muthoot, gaining share from peers; high gold prices are leading to strong recoveries from NPLs and loans sold to ARCs. Shriram Finance is our best pick in the vehicle finance space. LICHF sold off post results, likely due to weak margins; tailwinds include improving disbursements and about 28% borrowings (short-term. linked to repo/t-bill) which will be repricing immediately after policy rate cut.
Performance highlights of key diversified financial companies: 1QFY25
- Aavas. Aavas' PAT was up 15% yoy, broadly in line (Rs1.3 bn) with 21% growth in core PBT (7% ahead of estimates). A 22% loan growth (13% disbursement growth) translated only to 8% NII, reflecting pressure on NIM. Operating expense growth was muted at 3% yoy with a 3% decline in employee expenses (tempered by ESOPs). Credit costs were moderate at 20 bps, as the gross stage-2 ratio was up 11 bps qoq to 1.6% and gross stage-3 ratio was up 7 bps qoq to 1.0%.
- Aptus. Aptus reported 21% yoy PAT growth and 21% core PBT growth. Disbursement growth was muted at 4% yoy in 1QFY25 due to low productivity in April 2024 when new LOS went live. Disbursement growth picked up to 26% yoy in May 2024 and 44% in June 2024. Calculated NIM was down 24 bps qoq, driven by 10 bps rise in cost of borrowings and higher leverage. Stressed loans were up 84 bps qoq, driven by seasonality in collections; yoy trends are more benign with a flat 30+dpd ratio of 6.3%.
- Bajaj Finance. Bajaj Finance reported a PAT of Rs39 bn in 1QFY25, up 14% yoy. NII growth was strong at 25% yoy, driven by strong loan growth of 31% yoy (7% qoq). Reported NIM was down 23 bps qoq due to a 13 bps qoq increase in the cost of funds and a 10 qoq decline in yields. Cost ratios remained moderate at 4.1% in 1QFY25 (flat qoq). Credit costs shot up to 2.0% in 1QFY25 (up 43 bps yoy and 33 bps qoq), driven by a rise in delinquencies and higher write-offs. Gross stage-2 inched up to 1.4% (1.2% in 1QFY24 and 1.2% in 4QFY24). Gross stage-3 was flat, both yoy and qoq at 0.9%.
- Cholamandalam. Chola reported 30% earnings growth in 1QFY25, with 39% core PBT growth. Its 40% NII growth was led by 35% loan growth. The changing business mix led to 13 bps yoy NIM expansion and an increase in the cost-to-AAUM ratio of 3.1% (2.8% in 1QFY24). Credit costs were elevated at 1.5%, driven by higher provisions on a low base. Asset quality performance was broadly satisfactory; the gross stage-2 ratio was up 30 bps qoq to 2.5% (down 102 bps yoy) and gross stage-3 ratio was up 14 bps qoq (down 44 bps yoy) to 2.6%.
- Five Star. Five Star reported 37% yoy PAT growth and 35% core PBT growth in 1QFY25. While AUM growth was strong at 36% yoy and 7% qoq, disbursement growth has moderated to 16% yoy in 1QFY25. Reported spreads were flat qoq at 14.6%. Operating expense growth was lower than AUM growth at 24% yoy leading to moderation in cost-to- AAUM ratio of 6.3% from 7.0% in 1QFY24 and 6.4% in 4QFY24. Credit cost was moderate at 0.7% compared to 0.5-0.8% reported in the previous four quarters.
- Home First. Home First reported 27% earnings growth, with 18% growth in core PBT. NII was up 18% yoy, reflecting the interplay of a 35% yoy AUM growth and 104 bps yoy NIM compression, reflecting a 46 bps yoy yield compression, a 36 bps yoy rise in the cost of funds and higher balance sheet leverage. Operating expenses growth at 19% yoy was lower than AUM growth. Credit costs were moderate at 0.2% (0.1-0.4% in the previous four quarters). Stressed loans were up 19 bps qoq due to higher write-offs and a moderate rise in delinquencies.
- India Shelter. India Shelter reported strong 77% growth in PAT and 112% yoy growth in core PBT. Loan book was up 36% yoy on the back of 23% yoy growth in disbursements. Reported spreads were stable qoq at 6.1%; calculated NIMs were lower, reflecting lower treasury income. Cost/AUM was down 40 bps yoy, stable qoq. Credit costs inched up marginally to 42 bps; gross stage-3 loans were up 17 bps qoq and 13 bps yoy to 1.14% with 30 dpd increasing marginally to 3.5% from 2.9% in 1QFY24.
- LTF. L&T Finance's PAT was up 29% yoy (Rs6.9 bn) in 1QFY25 due to 21% growth in core PBT. NII growth of 23% was led by 13% AUM growth and 102 bps NIM expansion, reflecting higher retailization. Growth in the retail book of 31% yoy and 6% qoq was driven by home loans (up 39% yoy), micro loans (up 31% yoy) and 2W finance (up 31% yoy). NIM expanded 15 bps qoq to 9.3%, led by an 11 bps qoq decline in cost of borrowings, while yields were flat qoq. Credit cost was also moderate at 2.4%, in line with the previous four quarters (2.4-2.6%); the gross stage-3 ratio was stable qoq at 3.1%.
- 4 LICHF. LIC Housing Finance reported a 2% decline in PAT, with 12% lower core PBT due to 44 bps yoy and 39 bps qoq NIM compression, mostly reflecting lower yields. Retail disbursements were up 17% yoy, leading to 6% retail and 4% overall loan growths. Operating expense growth was moderate at 8% yoy, leading to cost-to-AAUM ratio of 36 bps. LICHF cut its ECL coverage by 22 bps qoq, leading to muted credit cost of 20 bps.
- Mahindra Finance. Mahindra Finance reported PAT growth of 47% yoy and core PBT growth of 14% yoy. NII growth was moderate at 13% yoy, despite strong 23% loan growth due to 65 bps yoy NIM compression. NIM compression was driven by both moderation in yields (down 49 bps yoy and 38 bps qoq) and rise in cost of borrowings (up 40 bps yoy and 16 bps qoq). This likely reflects a shift to lower-yield segments. Credit cost was low at 1.7% driven by qoq flat overall ECL coverage and moderate write-offs.
- SBFC. SBFC reported 68% 1QFY25 PAT growth. NII was up 53% yoy, led by 35% yoy AUM growth and 170 bps yoy NIM expansion; disbursements were down 18% yoy. The opex/AUM ratio improved to 4.7% (4.9% in 4QFY24, 5.3% in 1QFY24). While credit costs were stable at 80 bps (in line with previous quarters), the 1+dpd ratio was up 78 bps qoq to 6.4%. The gross stage-2 declined 66 bps qoq to 3.7%, while the gross stage-3 ratio was up 18 bps qoq to 2.6%.
- Shriram Finance. Shriram Finance reported PAT growth of 18% yoy driven by core PBT growth of 28%. NII was up 25% yoy driven by 21% AUM growth and 36 bps yoy NIM expansion. NIM expansion yoy was driven by faster growth in the SCUF portfolio on a low base. AUM growth was driven by newer segments such as MSME (up 44% yoy), 2W (up 29% yoy) and PV (up 27% yoy). CV growth was moderate at 14% yoy. Operating expense were up 16% yoy, lower than AUM growth. Credit cost was moderate at 2.1%.
Asset/wealth managers: Stronger quarter for AMCs and RTAs
AMCs reported sequentially stronger quarter led by stronger markets and steady net inflows in equity. AUM growth to revenue growth translation was on-expected lines. Revenue yields were supported by stronger equity mix and in general were ahead of estimates. RTAs reported stronger non-mutual fund revenue growth. 360 One also reported a strong earnings quarter helped by higher transactional income. All companies benefitted from strong other income due to treasury/MTM gains. CRISIL and ICRA reported relatively muted results.
- 360 One: Transactional income drives earnings to top gear. 360 One's 1Q results beat expectations, with ~35% yoy earnings growth, driven by ~25% yoy recurring revenue growth and ~2X yoy growth in transactional (including carry) income. Expense growth of ~25% yoy was lower than expected as one-time employee expense provisions of 4Q were reversed. Recurring AUM grew ~30% yoy (~10% qoq). The cost-income declined sharply to 38% (from 49% in FY2023) due to strong transactional income. The company booked an exceptional charge of Rs880 mn to settle a case in the UK.
Key operational takeaways: (1) Active ARR flows were Rs55 bn (Rs59 in 4Q and ~Ra160 bn in FY2024), led by wealth (Rs47 bn), whereas AMC was impacted by outflows from older funds; (2) active ARR retention declined to 72 bps from 75 bps qoq, driven by distribution assets and lending book within wealth (declined to 71 bps from 76 bps qoq), whereas asset management was stable (74 bps); (3) the HNI business is in the early stages of ramp-up, with a team size of nearly 70-75 and initial flows of US$75-80 mn; (4) global/HNI business could reach Rs80-110 bn of AUM (~5% of recurring AUM); (5) while transactional business is unpredictable, the outlook is positive, given opportunities on unlisted and the credit space. The company highlighted recent changes in the budget are positive for the wealth business to expand its scope of offerings.
ABSL AMC: Core earnings up 30% yoy. ABSL AMC reported 30% yoy growth in core PBT (i.e., PBT-other income) due to ~25% yoy revenue growth and 18% yoy expense growth, led by 15% yoy growth in employee cost and ~20% yoy growth in other costs. Cost-income declined ~250 bps qoq to ~37% ((-)150 bps yoy). Overall, AUM growth was ~20% yoy (6% qoq) with equity AUM growth of 37% yoy (7% qoq). Closing MF AUM reached Rs3.5 tn (13% qoq) and closing equity at Rs1.7 tn (12% qoq). Closing equity AUM is ~5% above the quarterly average equity AUM.
ABSL's fund performance for the key equity funds we track has been volatile over the past few quarters. Compared with 4QFY24, we do not see any major change in operational trends. While we await more solid evidence of a flow turnaround in flagship equity categories, the company has seen growth support from thematic funds (such as digital, PSUs and value) and the recent launch of a quant fund. In line with previous commentary, redemption pressure has eased over the past few quarters. Our calculations of implied flows across major categories (large, mid, small, large-mid, flexi, multi, balanced) suggest subdued trends over March-July 2024. Other monitorables such as SIP market share and folio addition are progressing well.
CAMS: Revenues up 27% yoy; core earnings growth of 43% yoy. CAMS reported ~40% headline PAT growth with core PBT growth of ~43% yoy on the back of 27% yoy revenue growth and ~20% yoy operating expense growth. Key result highlights: (1) AUM growth of 35% yoy and ~9% qoq with equity AUM growth of ~55% yoy and 11% qoq; (2) Stable market share in overall (68%) and equity segment (67%) market share; (3) EBIT margins improved to 42% (+400 bps yoy), reflecting the revenue growth in higher margin MF RTA business as well growth acceleration in non-MF businesses. Share of MF RTA in overall revenues is 87% (largely flat yoy).
Overall MF revenue growth was 26% yoy (7% qoq) with asset-based revenues up 27% yoy (8% qoq) and non-asset-based revenues at 23% yoy (3% qoq). Revenue yield on asset-based revenues declined 1% qoq to 2.4 bps of MF AUM. The company has not seen impact of any major contract renewal after the renegotiation with one of the largest clients in FY2023-24. Headline non-MF revenues grew 31% yoy and 5% qoq. Across businesses, revenue growth was the strongest in KYC business (~2X yoy), followed by payments (~45% yoy) and AIF/insurance (~10% yoy). Non-MF businesses, while having small contribution for CAMS, are gaining scale in their respective niches (KRA, payments, AIF), partly aided by industry tailwinds.
HDFC AMC: Core earnings growth of ~40% yoy. HDFC AMC reported ~25% yoy earnings growth, driven by ~35% yoy revenue growth, ~10% yoy other income growth and ~22% yoy expense growth. Core PBT (i.e., ex-other income) growth was strong, as expected, at ~40% yoy and 11% qoq. Quarterly AAUM was up 38% yoy (10% qoq), with equity AUM up 64% yoy (12% qoq) and debt AUM up 10% yoy (5% qoq). Staff costs were up 21% yoy, whereas other costs (incl. business development) grew 23% yoy.
Blended 1Q revenue yield was up 2% qoq at ~46 bps. Yield rise is due to a sharp decline ((-)7% qoq) in 4Q year-end adjustments (true-ups) to align direct TER to commission payouts. Adjusting for this, on underlying basis, yields have declined from ~47 bps at the start of the quarter to ~46 bps in 1Q. The strong equity AUM growth has led to a decline in equity yields to ~58 bps in 1Q (versus ~69/67/63/59 bps in 1Q/2Q/3Q/4Q).
HDFC continues to acquire a large share (~45%) of new investors in the industry. Monthly SIP flows (~60% yoy; 15% qoq) have grown at a significant premium to the industry (~45% yoy; ~9% qoq). The company is seeing strong flows across channels, especially the direct channel (likely accelerated by the strong performance sensitivity of fintech channels). The share in the HDFC Bank's channel is ~30% on book-basis and higher for incremental flows.
Kfin Technologies: Core earnings growth of ~50% yoy. Kfin reported strong core PBT growth of ~50% yoy and overall PAT growth of ~55% yoy. Revenue growth of ~30% yoy was marginally ahead of estimates, which along with in-line expense growth (24% yoy) drove ~45% yoy EBIT growth. As a result, EBIT margin expanded ~300 bps qoq to 42%. Seasonally, 1Q tends to have the lowest EBIT margins, implying a good start to the year both on growth and margin front.
MF RTA revenues grew ~35% yoy and 8% qoq. Overall AUM grew ~40% yoy and ~10% qoq, with marginally higher market share (~32%). Equity AUM growth was higher at ~50% yoy and 11% qoq with stable market share (~33%). SIP market share declined marginally qoq to ~39%. MF RTA yield declined 2% qoq to 3.6 bps (-5% yoy). Non-MF revenue growth was 23% yoy, supported by issuer solutions (~22%) and international/alternatives (57%) but offset by global business services (-4%; linked to US mortgages). Steady client wins across issuer, international and domestic alternatives business is a likely result of Kfin's product/proposition along with increased efforts on the sales/business development to drive stronger growth
Nippon AMC: Core earnings grew ~60% yoy. Nippon AMC reported ~60% yoy core PBT growth due to 43% yoy revenue growth, while expense growth was at 22% yoy. Headline PAT grew ~40% yoy, with other income growth of 12% yoy. Overall AUM reached Rs6 tn (50% yoy), of which MF AUM stood at Rs5 tn (up ~55% yoy and 18% qoq). Equity AUM is up ~70% yoy and 14% qoq. The quarter had higher expense growth, led by staff costs (35% yoy) due to spends on hikes, provisions for variable pay and new hires. The core cost-income was ~100 bps lower qoq at ~39%.
Nippon's strong fund performance is driving strong flows across categories such as large, small, mid and multi-cap. Over 90% of active equity AUM is in the top-two quartiles. While the company does not disclose this, our sense is Nippon's flow market share is likely to be around the ~10-12% handle, higher than the 7% AUM market share. Monthly SIP flows of ~Rs26 bn imply ~12% market share, compared with 8% last year. The blended revenue yield declined 5% qoq to ~42 bps, as a positive mix effect (~50 bps higher equity) was offset by telescopic pricing changes on active equity (declined to ~60 bps from ~63 bps qoq), given strong AUM growth along with strong growth in ETFs (yields 10-15 bps).
UTI AMC: Operating leverage drives core earnings beat. UTI AMC's core PBT grew ~40% yoy (25% qoq), driven by revenue growth of 19% yoy (6% qoq) and expense growth of ~7% yoy (-5% qoq). Overall, AUM grew 20% yoy (5% qoq), led by all segments (MF, pension and international). MF AUM grew 25% yoy (7% qoq). Core cost-income declined sharply to 57% (from 64% in 1QFY24). Other income increased ~5% yoy due to MTM gains.
Our observations with respect to UTI's operating trends have largely remained unchanged for the past few quarters. Active equity fund performance of major funds remains weak, with over 80% of AUM in the bottom two quartiles. As a result, net fund flows have remained negative for eight consecutive quarters. Our calculations suggest July flows remain weak as well, but are improving mom. UTI AMC's blended MF revenue yield was flat qoq at 34 bps. Yields improved despite a stable equity mix and a higher share of passive funds qoq.
Rating agencies
CRISIL. CRISIL reported 7% yoy PBT growth ((-)3% versus KIE), led by 3% yoy revenue growth, 4% yoy expense growth and 2% growth in other income. EBIT grew 7% yoy due to lower depreciation costs. The EBIT margin increased ~100 bps yoy to 24%. Higher tax rate led to earnings being flat yoy. 2QCY24 is seasonally stronger sequentially (PBT up 6% qoq).
The Ratings division's revenues grew 11% yoy (5% qoq) in 2QCY24. Ratings' revenues include the Domestic Credit Ratings business along with the captive S&P support. Domestic Ratings' revenues grew 11% yoy, versus 12% growth in 1Q and ~17% yoy growth in CY2023. Overall, bank credit growth in Q2 was ~16%, but was led by retail and services, whereas industry credit growth was muted by 7% yoy. Bond issuances also declined ~35% yoy. Operating margins were stable yoy at 40% (seasonally lower in 2Q), but lower than expected, likely due to the higher share of the captive center.
The Non-Ratings segment's (Research, Analytics and Solutions) revenues grew 1% yoy (1% yoy in 1HCY24; 12% yoy in CY2023). The segment's margin expanded (~250 bps yoy) to 21%. Within Non-Ratings, the Research & Risk vertical continues to be impacted by discretionary budget cuts by global clients, while lending/regulatory verticals performed relatively well. Given that 1H revenues are almost flat yoy, the ask on 2H to growth is much higher to deliver CY2024 revenue growth of ~7%. We have cut our revenue growth forecasts for the vertical, given the higher-than-expected impact of budget cuts.
ICRA. ICRA's 1Q results were below expectations, with earnings down 12% yoy, driven by 12% yoy, along with a ~20% yoy growth in expenses. The EBIT decline was lower (3% yoy) due to higher finance and depreciation expense. Higher expense growth was driven by employee expense growth of 18% yoy. EBIT margin declined ~400 bps yoy to 27%.
Ratings' revenues were up 9% yoy, starting the year relatively weaker than 12% yoy growth in FY2024. Fresh bond issuances were weak in 1Q (~35/40% decline in overall/NBFC bond volumes), partly due to base effects. Slower growth in bond markets was mitigated by stronger growth in bank credit, CP issuances and securitization paper. The revenue growth of ICRA's Ratings segment was marginally weaker than CRISIL's (11% yoy).
Overall, Non-Ratings' revenues grew ~15% yoy, partly helped by an acquisition in 3QFY24. Knowledge Services' (~80% of Non-Ratings' revenues) revenues grew 5% yoy. This segment largely depends on Moody's for revenues. As mentioned in previous calls, we believe slower growth is a reflection of lower end-market volumes, along with a change in the scope of work, given the ongoing shift toward automation. |
