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Steady quarter; RoA expansion on track
* FB reported 1QFY20 PAT of INR3.8b (+46% YoY, our estimate: INR3.5b), led by controlled provisions (-4% YoY to INR1.9b) and higher other income (+45% YoY).
* NII stood at INR11.5b (+18% YoY), which, coupled with higher other income, drove 24% YoY growth in total income. NIM shrank 2bp QoQ to 3.15%. Core fee income grew robustly by ~35% YoY to INR2.2b and was well supported by treasury profit of INR0.9b (+86% YoY).
* Loan growth of 1.6%/18.8% QoQ/YoY was driven by retail + agri loans (+24% YoY), whereas growth across business banking/commercial banking slowed down to 13%/12% YoY. Deposit base grew 19% YoY to INR1.3t, led by term deposits (+23% YoY). CASA mix moderated to 31.4% (-71bp QoQ).
* Fresh slippages increased to INR4.2b (1.5% annualized), driven by slippages in the retail (INR1.4b) and SME (INR1.2b) portfolios. Corporate slippages came in at INR880m (v/s nil in 4QFY19) as the bank downgraded two IL&FS entities (INR320m). Healthy recoveries/upgrades at INR2b drove a 60bp QoQ improvement in the PCR to 50.7% (67.4% including tech. w/o). GNPA/NNPA ratios increased marginally by 7bp/1bp QoQ to 3%/1.5%.
* Other highlights:
(1) FB maintained its credit cost guidance of 55-60bp for FY20.
(2) IL&FS exposure stands at INR2.4b, of which INR320m is NPA and the remaining INR2.1b (amber category) is standard, where FB carries a 10% PCR.
(3) Stressed exposures: The bank has exposure toward two HFCs, which are still standard (INR2.8b, carries a PCR of 15% on exposure to one HFC).
* Valuation view:
FB has maintained strong momentum in business growth and is reporting a gradual improvement in operating earnings. It has limited exposure to stressed entities, while the healthy coverage ratio of 67.4% (including TWO) will likely facilitate controlled credit costs. With stronger growth in retail and management guidance of increasing the retail mix to 50%, the margins will likely improve gradually. We raise our FY20/21 PAT estimate by 0.9%/2.4%. Over FY19-21, we expect 20bp RoA expansion and RoE improvement to 13.3%. Maintain Buy with revised PT of INR125 (1.6x FY21E ABV).
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