* AU SFB’s performance in Q4 FY21 was a mixed bag with strong performance on business volumes/growth and some disappointment in the form of increase in reported NPLs.
* The robust recovery in new loan originations during Q4/H2 FY21 highlights strong market position of the bank in its key products of Wheels, SBL MSME and Home Loans, and in key markets.
* New business booking continues at better spreads, as while incremental portfolio yield has been firm courtesy vintage products (Wheels & SBL MSME are better yielding) driven growth, the incremental funding cost has come down sharply over the past few quarters due to material lift in CASA share and significant reduction in TD rates.
* Core fee income (ex. PSLC, treasury, stake sale and BD recovery) continues to grow far ahead of the balance sheet.
Our view –
Credit cost to remain elevated in coming quarters: Though overall collection efficiency (incl. arrears) for Q4 FY21 stood significantly higher than Q3 (107% v/s 97%) and the share of current portfolio improved (81% v/s 78% as of Dec), the reported Gross NPL increased to 4.3% due to inclusion of <90 dpd paying accounts once tagged as NPLs (1.5% of gross loans) considering retrospective vacation (from Sept. 1) of the SC stand‐still order.
Management believes that majority of the latter pool will regularize over coming quarters (88% paid in March). However, NPL correction would be challenging to achieve in H1 FY22 considering that collections could materially drop in April‐June on pandemic impact, about 60% of the <90 dpd NPL pool is SMA‐2 and restructuring stands at 1.8% of gross adv. With contingency provision buffer at <20 bps of gross adv, the credit cost could remain higher‐than‐usual in the next couple of quarters.
Factoring a higher credit cost and a lower growth in FY22 due to the ongoing pandemic wave, our FY22/23 earnings estimates undergo material cuts. Given transient asset quality challenges, an agile and responsive growth model and attractive structural story of the bank, we retain ADD rating on the stock with a lowered 12m PT of Rs1150. AU SFB is trading at 4.3x FY23 P/ABV.
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