Bank is heading in the right direction; valuations are inexpensive; ‘Buy’ retained with TP rising to Rs 725
Also, 8-9% q-o-q deposit/CASA growth, lower IB fees are aiding granularisation of the business model.
IIB’s Q2FY21 result was in line with our expectations operationally, and we think IIB is heading in the right direction, with: (i) focus on building granular deposits; (ii) building provision buffers; (iii) de-bulking fees; and (iv) reducing risk profile in the corporate segment. Provision cover improving to 77%, COVID provisions of Rs 21.5 bn (1.1% of loans) with guidance of continued provision build-up and collection efficiency improving to 95% provide some comfort. Also, 8-9% q-o-q deposit/CASA growth, lower IB fees are aiding granularisation of the business model.
We build in credit cost of 310/190bp for FY21/22F, normalising to 140bp in FY23F and build in loan growth of 4%/12% for FY21/22F with ROEs of 8%/12% in FY21/22F normalising to 14% in FY23F. Current valuation at 1xFY22F P/BV is inexpensive especially in the context of improving granularity of B/S and P&L. We hence maintain Buy and raise our TP to Rs 725, implying 1.2x Sep-22 book.
Key highlights of the quarter (i) Loan growth of 1.6% q-o-q was driven by vehicle finance book growing 3% q-o-q, while MFI book contracted 5% q-o-q given lower disbursements; (ii) deposits grew 8% q-o-q with CASA growing 9% q-o-q. More importantly, deposits/CASA has grown 13% from Q420 levels; (iii) excess liquidity led to NIMs contracting 10bp q-o-q but with deposit rate cuts and high yielding MFI/CV disbursements picking up NIMs should stabilise going forward; (iv) fees are still weak (down 28% y-o-y) but bulky fee contribution was significantly lower; and (v) weak fees and some compression in NIMs led to flat y-o-y core PPOP – in line with our expectations.
Asset quality highlights GNPLs were flat q-o-q at 2.2% and, adjusting for Supreme Court order on NPA recognition standstill, GNPLs would have been 2.3%. Collection efficiency improved to ~95% in Sep, improving further in Oct. IIB expects restructuring at low-single-digits and continues to upfront provisioning with COVID provisions now at 1.1% of loans (Rs 9.5 bn in Q2) made especially for CV/MFI book and PCR improved to 77% (63% in Q4). This, in addition to core PPOP/assets of ~3.1-3.2% (FY21/22F) provide the necessary comfort.
Valuation remains comfortable With headwinds around liabilities easing and collection efficiency improving, we find current valuations at 1x Sep-22 book undemanding. We maintain Buy, with an increased TP of Rs 725/share, implying 1.2x Sep-22 book (earlier 1.1x Jun-22F book).