The transitional phase continues to throw surprises at the Street which is currently unidimensionally focused on asset quality, where we believe trends should stabilize within 1-2 quarters.
The challenge is to believe the sustainability of core Op. Profit growth once credit cycle turns & the bank managing to build alternate good-yield businesses & a better liability franchise. Maintain ‘hold’ with price target of R150.
The total stressed assets stand at 10.6% of net advances vs 9.5% q-o-q. Management maintained the earlier guidance of lower slippages (R150 billion) & higher recoveries (Rs100 billion) for FY17 vs FY16.
The gross NPA number (Q1FY17: R429.9 billion) is guided to be about R450-500 billion by end of the fiscal, with a bias towards the lower end of the range, although there might be front-ending of slippages and back-ending of recoveries.
NII was down 2.6% year-on-year, but beat our muted estimates, driven by stronger than expected NIM (2.23%, flat year-on-year). Other income was strong (+49% y-o-y), mainly due to treasury income. Core fee income also fared well, growing 12.4% y-o-y.
While total revenue grew 9% y-o-y, expenses were down 3.5% y-o-y, largely driven by a fall in employee cost owing to a one-time cost in Q1FY16.
We have upped FY17 est. by 11% on expectation of better NIM – shedding low yielding assets and high cost funds, although we are not so certain of continuous NIM improvement when credit growth picks up assuming commensurate improvement in liability franchise by then.