Loan growth, lower cost targets positive for M&M Financial Services

Mahindra & Mahindra Financial Services or M&MFS may enjoy favourable tailwinds in the second half of financial year 2026 (H1FY26) with rising demand for its core line of vehicle finance and also lower cost of finance.

 

Also, while it has high credit costs, the asset quality has improved with accelerated write offs.  

 

MMFS has a deep rural presence across 500,000 villages, and a 12 million customer base.

 

It is ideally positioned to benefit from stronger rural demand. The long-term target is to push assets under management or AUM to over ₹3 trillion by 2030 from the current ₹1.27 trillion.

 

It has improved its underwriting architecture, institutionalised artificial intelligence or AI-driven collections and enhanced risk governance systems.

 

While holding onto leadership in vehicle finance, it’s looking to expand operations across housing finance, LAP, insurance, and investment distribution.

 

It has invested in AI integration across underwriting and collections to unlock scale while holding opex in the 2.5-2.7 per cent band.

 

Over a five-year timeframe, management is guiding for 18-20 per cent loan growth, and lower credit costs of 1.3-1.7 per cent and return on assets or RoA of above 2.2 per cent. 

 

MMFS reported a net profit of ₹570 crore in Q2FY26, up 54 per cent year-on-year (Y-o-Y).

 

The net interest margin (NIM) expanded 12 basis points quarter-on-quarter (Q-o-Q) to 6.8 per cent and collection efficiency picked up to 96 per cent in Q2FY26 from 95 per cent in Q1FY26 and gross stage-2 and 3 ratios were flat Q-o-Q at 9.7 per cent.

 

One concern is higher credit costs of 2.4 per cent (1.1 per cent in Q2FY25 and 1.4 per cent

in Q1FY26). Loan growth was moderate at 13 per cent with only 3 per cent Y-o-Y growth in disbursements. M&MFS has recognised credit costs upfront and pushed stage-3 provision cover to 53 per cent vs 51 per cent in Q1FY26.

 

There could be provision write backs and disbursement should pick up.

 

In Q2FY26, the vehicles business grew 3 per cent Y-o-Y with market share in tractors, 3W, PVs, used commercial vehicle or CVs and small CVs being maintained. M&MFS reported 13 per cent Y-o-Y growth in AUM at ₹1.27 trillion.

 

The share of M&M assets to total AUM was maintained at 43 per cent. The Q2FY26 saw ₹ 420 crore of write-offs, the same as in Q1.

 

MMFS is well-capitalised at Tier-I ratio of 16.9 per cent after a recent rights issue.

 

The management believes passenger vehicles and tractors should drive growth with SUV premiumisation a factor along with strong tractor demand. The used vehicles segment could deliver 20 per cent of AUM in the medium term.

 

M&MFS is also focussed on affordable housing in the mortgage business.

 

The credit cost guidance is 1.7 per cent in FY26 with disbursement and AUM growth in mid to high teens for the next three years. The credit cost guidance may be a little optimistic, given credit cost of 2 per cent in H1FY26 and some analysts are projecting it at 1.9 per cent.

 

Further, the opex to assets ratios will be in the range of 250-270 basis points with a ceiling of maximum 280 basis points. Opex costs are elevated as the company is investing.

 

The management commentary highlighted strong volume growth in the passenger vehicle or PV segment post GST reforms.

 

Disbursements in used vehicles grew 4 per cent Y-o-Y while CV & construction equipment or CE disbursements saw de-growth. The growth in PV and tractors is expected to more than offset the slowdown in CV.

 

The reported spread improved to 7.0 per cent in Q2FY26, up from 6.7 per cent in Q1FY26 due to 30 basis points Q-o-Q improvement in cost of funds. Management expects spreads to stay in the range of 6.5-6.7 per cent in FY26.

 

Fee income has seen steady growth to 1.4 per cent of average assets (1.1 per cent in Q2FY25) led by higher dividend income from Mahindra Insurance Brokers.

 

Investors need to watch asset quality trends since GS3 ratio and the Net Stage 3 ratio went to 3.94 per cent and 1.89 per cent respectively in Q2FY26 compared to 3.85 per cent and 1.91 per cent in Q1FY26.

 

The management highlighted seasonal weakness as a cause and expects asset quality ratios to improve through H2. The stock has rallied 13 per cent in the past three months.