Quarter was weaker than our muted expectation – sharp NIM collapse from interest reversal owing to higher NPLs, continued weak fees. We expect Sept quarter to be even worse operationally and an even higher NPL recognition, but perhaps offset by gains from IPO proceeds of life insurance subsidiary. Much of the weakness is in the price or is known and H2 should be much better. Retain buy with target price of Rs305.
Fresh slippages were Rs82.49 vs Rs70 billion in Q4FY16, implying a slippage ratio (as a % of 12 m prior loans) of 8.3% vs 7.2%. This was offset by strong reductions in NPA driven by ARC sales. Gross NPA ratio worsened 5bps q-o-q to 5.87%. Net NPA ratio, however, worsened 37bps qoq to 3.35%, dragging the provision coverage ratio (including written-off accounts) to 57.1% vs 61% qoq. Exposures at risk are Rs453 billion, 4.9% of the bank’s funded and non-funded exposures vs 5.5% q-o-q.
Core pre-provision operating profit was down 5.4% y-o-y, 9% below JEFe. NII grew only 0.8% y-o-y, but weakness was expected (above JEFe by 2%). NIM (3.16%) fell sharply, down 21bps q-o-q, primarily on account of reversal of interest income on slippages. Loan growth was 12% y-o-y, marginally ahead of our estimates. Non-interest income was up 15%, boosted by a 271% y-o-y growth in treasury income. Core fee continued to remain weak (+2% y-o-y, 3% below JEFe).