Asset quality issues likely to recede in FY21; estimates revised due to fund raise with TP rising to Rs 470
Capital raise of ~Rs 27 bn mitigates one of the key concerns around its ability to grow. While the other key concern over its corporate asset quality is still a work in progress, we expect it to impact only H2FY20 and normalise in FY21 with the bank delivering RoA of 1.3% and RoE of ~13%. Core strategy of growing retail and consistently improving liability profile remains in place and capital raise reduces risk around it.
Its core growth engines—credit cards and MFI – are growing well and will contribute ~40% to FY21e earnings. Core liabilities are getting better with improving CASA trajectory. An easy liquidity regime will also help, as capital risk is out of the way. Revise the estimates after the capital raise; expect better valuations as concerns have abated. We now value the bank at 2x FY21e P/BV. Raise TP to Rs 470 (from Rs 350).
FY21 likely to be normal; credit card and MFI to drive growth and earnings
Stressed corporate loans (~Rs 18 bn) have pushed up NPLs and provisions in FY20 and, may continue for another quarter. As the bank passes the hump of these NPL provisioning, we expect a sharp recovery in RoE/RoA. In the near term, we do not see risks to its Bajaj Finance tie-up; expect credit card portfolio to double over the next two years with incremental market share of ~10%. MFI is likely to continue its growth trajectory of 30-35%. With scale, we expect profitability and contribution of these businesses to improve further.
Concerns lower now; valuations to inch up; value the bank at 2.0 x FY21e P/BV
NPL pains coupled with lower tier-1 ratio impacted valuations. The recent capital raise will add ~330 bps to its CET 1 ratio and should aid growth over the next two years. On asset quality, expect credit cost of 125/115 bps for FY21/FY22 compared to 240 bps expected in FY20. We increase our target multiple to 2x FY21e P/B (earlier 1.6x) with revised TP of Rs 470 (earlier Rs 350) to factor in certainty of capital raise.