Progress on funding mix in FY21 a positive; FY22e EPS down 26% to factor in potential provisioning; TP cut to Rs 1270; Buy retained
IIB’s FY21 annual report underlines progress on improving funding-mix – share of retail deposits, ALM, etc. Premium of rates to large-banks is falling & there is scope for more that can help derisk loans. Asset growth slowed & RWA/asset fell back to 75%. Our recent conversation with mgmt indicates plan to build provs. for exposure to Vodafone-Idea (VIL) in FY22 that drives 20%+ cut to EPS est. Still FY23-24 estimates hold up as credit costs normalise towards 1.8%. Buy stays.
Deposit book building up well; some distance yet to be covered: Annual report shows that IIB has done well in scaling up its deposit franchise with (i) 40% y-o-y growth in retail deposits to 34% of total (partly low base); (ii) balancing of ALM profile versus a wide gap until FY19; (iii) fall in share of Top-20 clients in deposits to 22%. Bank’s share of retail deposits is lower than peers and mgmt. is targeting levels like 50%, but we also note that IIB has access to funding from NABARD/SIDBI at cheaper rates that form 11% of total funding. IIB continues to offer higher rates on deposits, but has lowered the premium vs. large banks in past few months by around 50bps, reflecting the traction on their deposit franchise.
Asset growth lower, RWA/asset normalises: During FY21, asset growth lowered due to weaker demand for retail loans and loss of some share in the corporate credit. Unlike larger private banks, IIB had relatively modest growth in loans to PSUs (16% y-o-y), due to higher funding cost and sell-downs. RWA/asset has normalised back to 75% in FY21 vs. 84% in FY20 and aging based split of NPLs shows that bank has raised buffer provisions on NPLs. Our recent conversations with mgmt. indicate business has improved further in August in vehicle sub-segments like LCV, cars, tractors & CE. MFI collections in most states have improved except West Bengal and Kerala.
Building provisions towards exposure to Vodafone-Idea: Management clarified that on their Rs 33-bn exposure to Vodafone-Idea (of which one-third funded) they plan to build 50-70% provision buffer towards potential haircuts. We understand the bank may use part of contingent provisions here and adjusted for that we build 65% coverage on this exposure in FY22 which drives a steeper cut – reflecting in ~60bps additional credit cost.
Maintain Buy: We cut FY22 earnings estimates by 26% to factor in potential provisioning. We trim our FY23-24 EPS by 3%. Also impact on TP is lower as we were already factoring in some haircut on this exposure. We maintain Buy with revised TP of Rs 1,270 (from Rs 1,300) based on 1.9x Jun-23 adjusted PB.