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Liability franchise strengthening; loan growth gains traction

Asset quality risks receding; expect RoA/RoE at 2.0%/16.7% in FY24E

* IIB’s consistent efforts in strengthening its liability franchise have been yielding results. After witnessing a sharp run down in deposits over Mar’20, the management has increased its focus on garnering Retail deposits. The same has grown by 59% YoY in Sep’21, while the mix as per LCR disclosures rose 980bp YoY to 41%.

* Loan growth over the past few quarters have been modest due to a challenging business environment and weak demand as the Corporate book witnessed a decline over FY21. However, the bank is witnessing a healthy recovery as it reported a QoQ growth of ~5% over 2QFY22. An improving CV cycle/demand outlook would keep the momentum healthy. We expect 17% loan CAGR over FY21-24E.

* The overall risks to asset quality are diluting. While provisioning is likely to continue, as IIB would provide for MFI/restructuring and is looking to set up contingency for its IDEA exposure, we expect credit cost to moderate gradually to 1.8% by FY24E and GNPA/NNPA to moderate to 1.8%/0.5% by FY24E.

* The IIB stock has delivered a healthy (24%) return over the past two months, owing to abating concerns around asset quality and improving business/demand outlook. Asset quality pressure is likely to remain in the near term. However, healthy PCR at 72% and provisions buffer of 1.4% of loans provide comfort. We expect a RoA/RoE of 2.0%/16.7% in FY24E. We maintain our Buy rating with a TP of INR1,400/share (1.9x 1HFY24E ABV).

Liability franchise strengthening; Retail deposit mix improves by 980bp YoY to 41%

IIB’s consistent efforts in strengthening its liability franchise has been yielding results. After witnessing a sharp rundown in deposits over Mar’20, the bank has increased its focus on garnering Retail deposits, which grew 59% YoY in Sep’21, while the mix, as per LCR disclosures, increased 980bp YoY to 41%. Concentration of the top 20 depositors has reduced to 21.7% (24.3% in FY19). LCR ratio too remains healthy ~145%. We expect IIB to deliver 16% deposit CAGR over FY21-24E, while the bank has suggested increasing the mix of Retail deposits to 45-50%.

Loan growth gains traction, up 10% YoY in 2QFY22 v/s flat in FY21

Loan growth over the past few quarters have been modest due to a challenging business environment and weak demand, particularly in the CV/ MFI segment. Corporate book too witnessed a decline over FY21, keeping overall loan growth muted. It witnessed a healthy recovery in the Corporate book in 1HFY22. 2QFY22 results suggest that overall growth is resuming as IIB reported a sequential growth of 4.8%, among the highest. A strong GDP forecast, along with an improving CV cycle/demand outlook, would keep the momentum healthy. We expect IIB to deliver 17% loan CAGR over FY21-24E.

CD ratio eases to ~80% in 2QFY22 from 100% in FY20; margin to remain stable

CD ratio has moderated to ~80% in 2QFY22 from the highs of 96-100% over FY20. It is likely to remain controlled as the management is targeting to keep it below 95%. Interest rate differential stands higher for IIB compared to large peers as the oneyear TD rate is 90-120bp higher, while the SA rate too remains high (4-5%) v/s ~3% for large Banks. While the CoD/CoF has moderated by 190bp/150bp over the past two years, there remains a scope for further improvement. Gradual reduction in cost of deposits, along with a high yielding book, is likely to support margin.

Receding asset quality risks; restructuring though remains elevated

Asset quality has been under pressure over the past few quarters, with stress being witnessed in the Retail segment, particularly in the MFI/Vehicle segment. Collections were impacted in 1QFY22, resulting in higher slippages. Restructuring book too remains high at 3.6% of loans, higher than other larger peers. While restructuring remains elevated, led by Vehicle/Retail segment (50%/15% in 2QFY22), the overall risks to asset quality is diluting. Improving demand outlook, coupled with abating concerns around its exposure to IDEA, augurs well for a gradual recovery. We expect GNPA/NNPA to moderate to 1.8%/0.5% by FY24E.

Credit cost set to moderate; focus remains on strengthening contingent provisions

BB & below pool, as a proportion of Corporate exposure (both fund and non-fund), has moderated to 5% in 2QFY22 after witnessing a sharp rise to ~7.8% in 2QFY21. Though the quantum remains higher than private peers, we do not expect material slippages from the same as slippages from the Corporate segment is seeing a gradual moderation. While provisioning is likely to continue, as IIB would provide for MFI/incremental restructuring and is looking to set up a contingency fund for its IDEA exposure, we expect credit cost to moderate gradually to 1.8% by FY24E.

Well on track to achieve the targets laid out under Planning Cycle 5

IIB seems to be on track to achieve the targets laid out under Planning Cycle 5 (CY20-23), which aims at scaling the business on a sustainable basis. It has a strong focus on reducing deposit concentration and increasing granularity through Retail deposits (target mix of 45-50%). The focus will be on building a granular asset book, targeting a loan growth of 15-18%, with unsecured mix to be less than 5%. PCR is likely to remain over 65%, with high capital thresholds. (Refer Exhibit 45 for details on Planning Cycle 5).

Return ratios to revert to historical levels; expect FY24E RoA/RoE at 2.0%/16.7%

Prior to FY18, the average credit cost for IIB stood controlled at 0.7% over FY10-18. Post FY18, exposure towards the IL&FS entities, along with other stressed accounts, resulted in a sharp increase in credit cost, which was further aggravated by COVID19. As a result, credit cost increased to ~3.8% in FY21. While we do not foresee credit cost to moderate to historical levels, we estimate it to moderate to 1.8% by FY24E, with a gradual reduction in asset quality risks. We expect return ratios to revert to historical levels and estimate FY24E RoA/RoE at 2.0%/16.7%.

Valuation and view

The IIB stock has delivered a healthy (24%) return over the past two months, owing to abating concerns around asset quality and improving business/demand outlook. Loan growth is witnessing a gradual recovery, while the liability franchise continues to show an improvement, driving a consistent reduction in funding cost. Asset quality pressure is likely to remain in the near term, with stress dominated by the MFI/Vehicle segment, however reducing gradually. Restructuring book too stands at 3.6%, higher than private peers. However, CE recovered sharply to 98% in Sep’21, which, along with a high PCR of ~72% and contingent provisions of 1.4% of loans, provides further comfort. We expect IIB to deliver a FY24E RoA/RoE of 2.0%/16.7%. We maintain our Buy rating with an unchanged TP of INR1,400 per share (1.9x 1HFY24E ABV).

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