There is nothing new under the sun
* IIB has reported PAT growth of ~23.8% yoy to Rs. 10.35bn, in-line with our estimates at Rs10.07bn, aided by steady credit growth and healthy operational performance.
* Balance sheet momentum remained strong with advance growth of ~29.4% yoy to Rs1507bn, led by strong growth in CV financing and rising refinancing opportunities.
* NII grew by ~19.6% yoy to Rs21.2bn with sequential decline in NIMs at ~392bps against ~396bps during Q4FY18. With costs accelerating yields, margin pressure may continue.
* Asset quality trends stable however fresh slippage ratio at ~1.31% remains concern. Credit cost for the quarter at ~14bps (19bps last quarter). We have adjusted estimates to account for a) healthy loan growth however with b) pressure on margins. We are yet to include BHAFIN in our earnings estimates. Our TP is based on ~3.5x FY20E Book. We maintain HOLD rating considering limited upside.
* Chasing quality growth:
While the retail loan growth momentum continued to stay strong at 20% yoy driven by strong traction in vehicle finance book. Like earlier, top rated accounts continued to dominate the incremental corporate loan mix. The faster expansion of corporate loans has also meant the share of retail loans stays at 40%. The IIB management continued to guide for an improvement in the share of retail loans to 50% of overall loan book without giving timeframe to achieve the same. On deposit front, CASA momentum intact at ~44% CASA share and overall CASA growth of ~37% yoy.
* Structural improvement in earnings post BHAFIN merger:
IIB’s Q1FY19 net profit was in-line with our estimates. We believe IIB’s earnings performance is currently at it’s peak with reported NIMs showing some tendency to weaken. With relatively faster rise in cost of funds (especially deposit cost) re-prizing of entire portfolio for IIB will take few quarters. Hence margin pressure is inevitable. The scenario can improve once BHAFIN merger is concluded and it’s microfinance portfolio becomes a part of IIB’s books.
* Asset quality trends stable:
Gross NPA ratio for the quarter remained stable sequentially at 1.15% (Q4FY18 – 1.17%) whereas Net NPA was at 0.51% (Q4FY18 - 0.51%) with PCR at ~56.2%. Provisioning charges remained flat on sequential basis. The management has stated that the bank has recognized MTM provisioning of Rs860mn upfront for its G Sec portfolio and has no dispensation used. Credit cost was ~14bps (19bps last quarter) with slippage ratio improving to ~1.31% against 2.68% last quarter.
* Revising earnings estimates:
We have revised our earnings estimates by c.6% FY19EFY20E factoring in healthy loan growth trajectory however with decline in NIMs (~10bps for FY19E/20E). We have not yet factored BHAFIN merger and its impact on earnings and book value.
Valuation and view
We are valuing IIB at ~3.5x FY20E Book of Rs556. This yields us revised target price of Rs1,947. Our FY20E EPS Rs99.1 discounts the TP 19.5x. To re-state what we have said in past in this space, IIB has re-rated 0.2x / year over the last planning cycles (9-10 years), through which, it has consistently delivered qualitatively better growth momentum in balance sheet and earnings metrics. IIB's target multiple is at a 0.5x discount to sector leader HDFCB, which we value at ~4x FY20E Book. We believe that a key hurdle to IIB's further re-rating shall be a successful integration of BHAFIN and delivery of earnings synergies. Based on our rating scale and absolute upside, we maintain our HOLD rating.
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