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Rectification behind, resurgence to begin

* Overall growth remained subdued in Q4FY21 but reported PAT of Rs9.2bn was slightly higher than the estimate of Rs8.8bn mainly due to higher fees. Headline GNPA ratio declined to 2.7% (from 2.9% in Q3) mainly due to write-off, while restructuring remained elevated at 2% of loans. Given the second Covid-19 wave, the bank maintains healthy 75% specific PCR and contingent buffer at 1% of loans.

* As per management, the consolidation phase is over and IIB should start re-growing the corporate portfolio with clear focus on quality/granularization. It is cautious on unsecured loans but would focus on growing the secured retail portfolio. That said, recent lockdowns could affect the self-employed category the most where IIB has higher dependence.

* IIB recovered from the deposit scare in FY21 with clear focus on retailisation of the balance sheet while creating a reasonable provisioning buffer to limit the asset quality impact going forward. Recent confidence capital infusion by promoters adds to the comfort.

* We believe RoA decline that began in FY19 has largely bottomed out in FY21 (RoA/RoE at 0.9%/7%) and should gradually normalize by FY23E to 1.7-1.8%/15%-16%, led by better growth/lower LLP. Retain Buy and slightly cut the TP to Rs1,125 (from Rs1,175), based on 1.7x FY23E ABV (1.8x FY23E ABV).

Subdued growth, but set to improve in FY22:

Overall loan book growth was muted at 2.8% yoy/2.6% qoq at Rs2.1trn due to the de-bulking of corporate book and slower momentum in retail. The consolidation phase is largely over in corporate, while retail credit growth on the back of secured loans should accelerate once lockdowns are lifted. Deposit growth remained healthy at 27% yoy/7% qoq despite a 50bps rate cut, with clear focus on retailisation and granularization of deposits, which should continue going forward. We believe that long-term retailisation of assets/liability will be NIM/fee positive for the bank.

Second Covid-19 wave could pose risk to asset quality, and thus bank retains healthy provisioning buffer:

GNPA ratio improved by 26bps qoq to 2.7% mainly due to write-off of Rs12bn in consumer finance and Rs8.3bn sold to ARC. Fresh slippages are higher at Rs38bn (7%) comprising of consumer loan slippages at Rs16bn (5% of loans) and corporate slippages at Rs22bn (10% of loans). However, corporate slippages included technical slippages of Rs19bn, which were due for restructuring, out of which Rs16bn are already upgraded post restructuring. Overall restructuring pool stands at 2% of loans, including 1.8% related to the impact from Covid-19.

Outlook and valuations:

We believe that the near-term asset quality risk persists but IIB is reasonably well covered, and thus should limit incremental provision cost. Current MD was part of the turnaround team in 2009 and has steered well the bank from deposit/asset quality scare in FY21 and now plans to take the bank back on a profitable & qualitative growth path. Retain Buy with a revised TP of Rs1,125 (based on 1.7x FY23 ABV). Key risks to our call/estimates: Prolonged and severe asset quality deterioration (mainly in retail portfolio) in the wake of the second Covid-19 wave, derailment in retail deposit mobilization.

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