IIB has demonstrated a healthy traction in operating performance over the past few quarters as it successfully braved the storm in late FY20 and FY21. It reported a loan growth of ~18% in 1QFY23 (vs average of 8% over FY20-22).
Improving business activity and a recovery in its core CV and MFI segments will aid overall portfolio growth and further ease credit cost. We expect 18% loan CAGR over FY22-24.
The management is strengthening its liability franchise, with an increased focus on garnering retail deposits. The same has clocked 39% CAGR over FY20-22, while the mix, as per LCR disclosures, rose by ~1,000bp to 41%.
Asset quality risks are receding, with a gradual reduction in stress from the MFI and CV book. The restructuring book too moderated to 2.1% of loans, which will keep slippages under control. The bank carries a healthy PCR of ~72% and a provision buffer of 1.2% of loans, which will result in a moderation in credit cost to 1.3% by FY24E.
With key issues addressed, and steady progression in earnings along with improving growth momentum we expect the stock to re-rate further. We estimate FY24 RoA/RoE of 1.9%/15.7% .
Improving business outlook
IIB is seeing a gradual recovery in loan growth over the past few quarters, led by a healthy pickup in both corporate and retail loans. Advances grew by ~18% y-o-y in Q1FY23 with Corporate/Retail loans up ~24%/13%. An improving CV cycle and demand outlook (road operators are operating at over 90% capacity) will result in a further pick-up. Corporate growth is likely to remain healthy, which, coupled with a recovery in the economic environment and the MFI cycle, will keep the momentum healthy.
Improving liability franchise
IIB has been successful in strengthening its liability franchise, with an increased focus on garnering Retail deposits. The same has clocked 39% CAGR over FY20-22, with the mix as per LCR up 1,000bp to 41%. Similarly, the concentration of the top 20 depositors fell to 17%. The management remains focused on increasing the retail mix to 45-50%. We expect deposits to clock 16% CAGR over FY22-24.
Margin to remain broadly stable
While the interest rate differential for IIB stands higher v/s its peers (25-80bp), it has narrowed in recent months. The SA rate for IIB has moderated to 3.5% v/s ~3% for large Banks. While this, coupled with a higher mix of fixed-rate loans, will limit margin expansion, an increase in the CD ratio, with higher yields on incremental lending, is likely to keep margin stable.
Receding asset quality risks
Asset has quality has been under pressure over the past few quarters, with slippages led by the restructuring book, particularly from the MFI/vehicle segment. However, the environment seems to be improving, with the management expecting it to gradually moderate in coming quarters. The restructuring book moderated to 2.1% of loans, with slippages in line with the management’s expectation. Slippages may remain slightly higher and recoveries healthy, which will result in a gradual recovery in asset quality. We expect GNPAs/NNPAs to moderate to 1.7%/0.4% by FY24.
Valuation and view
IIB is gearing up to deliver sustainable growth, fueled by continued market share gains in its key domains, while also scaling up new business verticals. Loan growth is seeing a gradual recovery, while the liability franchise continues to improve, supporting margin. This, coupled with a PCR of 72% and a contingent buffer of 1.2% of loans, will enable a sustained decline in credit costs, driving a sharp recovery in earnings. We expect IIB to report 39% PAT CAGR over FY22-24, resulting in a RoA/RoE of 1.9%/15.7% in FY24. We maintain our Buy rating with a revised
target price of Rs 1,450.