Q2FY14 earnings came in at R11.7bn (-10% year-on-year), higher than our estimates due to higher treasury income and low tax outgo. Core performance was in line, with expectations of lower margins and higher asset quality stress.
Highlights: Loan book grew by 6% quarter-on-quarter driven by all domestic segments – retail, agri, SME and corporate. Cost of funds declined in Q2 as CASA (current account savings account) ratio improved 100 basis points sequentially and the international cost of deposits also declined. However, margins declined 9 bps q-o-q and 41 bps y-o-y as competitive pressures on yields continue both in the domestic and international book.
Core fee income grew by 22% y-o-y, mainly driven by strong loan growth during the quarter. Bank transferred securities worth R64.8bn from AFS to HTM (available-for-sale to held-to-maturity) and recognised the complete loss in Q2 itself. On the asset quality front, though slippages declined 13 bps q-o-q to 2.3%, GNPL (gross non-performing loans) increased 16 bps q-o-q to 3.15%, while credit costs also remained high at 100 bps. With Rs 16.4 bn of restructuring during the quarter, the restructured book now stands at 7.7% of gross advances. Pipeline of R20bn of restructured assets and rate of slippages into NPA at 17.8% is worrying. Unusually low tax (at 6.34% of PBT—profit before tax) helped in restricting PAT (profit after tax) decline to 10% y-o-y, which is not likely to sustain.
We maintain a cautious outlook as pressure on asset quality has not subsided and cost pressures continue with the on-going wage and pension provisions. Buoyant fee income growth is marginally comforting. Overall we expect ROA and ROE (return on assets and equity) to remain subdued at 0.7%-0.8% and 13-14% over FY14e- FY16e. We maintain UW (underweight) with a revised target price of R501 (R478).