Expansion in core PPOP to drive non‐linear earnings growth; Upgrade earnings by 10‐12% and rating to BUY
We raise FY21/22 earnings and ABV estimates by 10‐12% and 2.5‐3% respectively on the back of material upgrade in PPOP expectations (higher NII and lower cost growth now) and significant reduction in credit cost assumption. The latter being underpinned by low impeding and susceptible flow (small SC‐order slippage pool and SMA‐2 + robust customer asset mix with only 6% coming from unsecured products) and management commentary on current Covid buffer (62 bps of adv.) being adequate to address potential stress. We estimate the stand‐alone bank to deliver 20‐22% earnings CAGR on a 6‐7% loan CAGR over FY20‐22 because of expansion in core PPOP margin.
We see no deterioration in RoA for the current year despite higher provisions and expect profitability to improve to life‐time high in FY22. KMB has underperformed in recent months and its valuation premium to HDFCB has dissipated. Expect valuation to re‐rate from current 3x FY22 P/ABV is response to likely continuation of non‐linear earnings growth. Upgrade rating to BUY and 12m PT to Rs1,670.
Key highlights of standalone bank performance
* A nearly 20% PPOP beat supported by 10% NII outperformance. Substantial decline in deposit cost driven by rationalization of SA and TD rates aided robust NII performance (5% qoq and 17% yoy)
* NIM improves by 12 bps qoq to 4.5%. Core fees recover 36% qoq and treasury income comes in at Rs4bn v/s estimate of Rs3bn.
* Share of CASA improves marginally to 57%. Cost growth was restrained on the back of reduction in non‐staff expenses.
* Loan book was stable with unsecured loans (PL, CC and BL) growing 3% qoq, agri finance up 7% qoq and the Corporate portfolio declining 3% qoq
* Reported GNPL and NNPL at 2.6% and 0.6% v/s proforma (including accounts that would have slipped after Aug 31) at 2.7% and 0.7% respectively. Rs920mn of provisions made against such pending slippages (~Rs3bn).
* Covid provisions at Rs12.8bn (60 bps of net adv.) with no addition in Q2 FY21. However, the bank raised core PCR significantly
* Overall a 68% earnings beat supported by better‐than‐expected PPOP and much lower‐than‐estimated provisions
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