UBS expects Bajaj Finance to de-rate and Jio Financial is one of the factors

UBS has also cited Jio Financial Services as a factor behind increased pressure on Bajaj Finance. It wrote in its note that Jio Financial's products will compete with those of Bajaj Finance in the medium term.

"Reliance Retail's network of 18,650 stores, Jio's customer base and Jio Financial's standalone equity base of ₹24,300 crore can drive expansion of Jio Financial's loan book," the note said.

While Jio Financial Services has already launched consumer durables financing and personal loans, it has autos, home loans and business loans in the pipeline, according to UBS and that could lower Bajaj Finance's yield on consumer loans. "We expect Bajaj Finance's Net Interest Margin (NIM) to contract 80 basis points over the financial year 2023-2026 due to a mix of lower yields and higher cost of funds," UBS said.

UBS believes that the quality of Bajaj Finance's customer base is peaking given it targets the mass-affluent market. The brokerage further wrote that Bajaj Finance's incremental growth should be driven by cross-selling new lending products to high-end customers, which may take time to ramp up and dilute its Return on Assets (RoA).

Bajaj Finance is currently trading at 5.5 times one-year forward price-to-book, which is below its long-term average. UBS also sees an earnings downgrade as the magnitude of the company's earnings upgrades has declined even as the company's earnings have outperformed consensus.

Shares of Bajaj Finance ended 0.4% lower at ₹7,445 on Tuesday and are up 25% over the last 12 months.