Deposit outflow post Yes Bank crisis a surprise; corrective steps raise hope; valuations offer comfort; ‘Buy’ retained.
During its investor call recently, IIB updated on its business and likely impact of COVID-19. We were negatively surprised by 10-11% outflow in deposits following Yes Bank’s fallout and on the asset side despite IIB’s asset moats. We think IIB’s exposure towards vulnerable segments remain high. Given the large economic impact of COVID-19-related lockdown, IIB’s positioning in assets is more vulnerable than that of its larger peers, in our view, in addition to its weak liability profile.
However, IIB’s 75% correction in the past 2-3 months with valuation multiples correcting from 15% premium relative to HDFCB to +30% discount to Axis Bank captures all the negatives. Management seems to be taking the correct steps now by front-ending asset recognition, building provision cover, focusing on granularity of liabilities and reducing bulky asset calls. If implemented, this should help IIB build a stronger franchise over time and lead to lowering of valuation discount to peers.
We estimate 10-12% loan growth and 220bp credit cost in our worst case assumption with ROEs normalising to 15% in FY22F after falling to 12% in FY21F. Valuations provide comfort, but we think larger banks provide a much better relative safety net to ride out the current cycle.
Liability weakness showing up – taking corrective measures
Management highlighted that deposit outflow of 10-11% following Yes Bank’s fallout was largely led by 2-3 states moving out deposits (65-70% of the total outflow) and partly led by corporates (+30% of the impact). This in context of a 2% outflow disclosure (17 March) is a clear negative surprise. Management indicated that this will lead to lower CASA ratios but will likely have limited impact on margins given it has replaced 50% of the outflow by refinance borrowing (3-yr duration) and partly by FX borrowings (7-month average durations), Bank CDs, and repo of excess SLR/non SLR investments.
The bank still maintains LCR of 112% and has not used any MSF facility. Further, management indicated that deposit flows have now stabilised. In case of further outflows, IIB still has large refinance opportunity (40% of loans PSL compliant) and recent cut in CRR and increase in MSF should help to mitigate any large outflows.
Our view: Historically, IIB has been weak on liabilities while asset moats made up for this in the past. The size of outflow is likely reflected in the steep stock price correction in past 2-3 months. IIB’s much higher bulk dependence and higher deposit concentration (top-20 depositors constitute +24% of deposits) is showing up in funding cost gap vs larger peers which has increased to 150bp vs 100bp in FY18. This restricts its ability to go down the risk curve . Management acknowledged weakness in liabilities and indicated a shift from growth focus to course correction.