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Result Highlights

* Asset quality: Annualized slippage ratio for 1QFY22 was elevated at 5.3% (Rs 4.8bn) but this was a pre-planned upfronting of full year slippages

* Margin picture: NIM at 3.86% was up 14 bps QoQ, despite CD ratio declining ~100 bps QoQ to 82%, due to lower interest reversals QoQ, among other factors

* Asset growth: Advances de-grew -1.7%/5.4% QoQ/YoY with gold loans being the go-to segment preventing growth from falling off a cliff

* Opex control: Total opex declined/rose -9.9%/7.7% QoQ, with sequential decline being driven by a -27.9% QoQ decline in other operating expenses

* Fee income: Fee income declined -11.5% QoQ due to expected weakness in business activity during the quarter owing to the second Covid wave

Our view –

Sticking to prior guidance, despite the second Covid wave, is a positive

Management has stuck to their prior guidance that full year slippages for FY22 would be slightly lower that slippages worth Rs 11.1bn observed over FY21:

Importantly, provisions declined 29% QoQ to Rs 17bn since management’s prognosis of underlying stress afforded them a utilisation of Covid provisions worth Rs 0.83bn. Management sees BAU slippages in 2HFY22 and added that they would utilise the residual ~Rs 0.6bn Covid provision during 2QFY22. Restructuring rose only somewhat on sequential basis to Rs 19.84bn as of June from Rs 18.49bn as of March. SMA2 book rose from 1.99% as of March to 3.16% as of June.

Management stated that a cost of deposits decline of 15-20 bps is still possible on the back of legacy liability re-pricing:

Management believes this is possible even though the bottoming out of the rate cycle precludes any meaningful deposit rate cuts. The guidance for NIM is that it would be in the 3.75-4% range. Interest reversals for the quarter amounted to Rs 0.2bn compared with Rs 0.7bn during 4QFY21.

Growth remains a structural challenge with management pointing to an anaemic longterm growth outlook for MSME lending:

Management does not see a reversion back to 18-20% growth for MSME loans but rather a lower long-term CAGR settling between 10-15%. Growth guidance for the full year FY22 remains mid to single digits. Gold loan book has doubled YoY on the back of NBFC-style short turnaround delivery, which has helped CUB compete with money-lenders and NBFCs.

We upgrade CUB to ‘Add’from ‘Reduce’ with an unchanged price target of Rs 166:

We value the bank at 1.7x FY23 P/BV for an FY22E/23E/24E RoE profile of 10.9/12.9/14.1%.

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