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Bulk SA proves to be a fickle source of funding

Result Highlights

* Asset quality: Gross slippage amounted to Rs 9.83bn (annualised slippage ratio of 1.3%) and recoveries and upgrades were healthy at Rs 9.45bn 

* Margin picture: NIM improved 25 bps QoQ to 5.17% aided by repricing of floating rate book and higher loan to deposit ratio

* Asset growth: Advances grew 4.9%/25.1% QoQ/YoY driven on sequential basis by healthy growth across various retail loan segments and SME loans.

* Opex control: Total opex grew 10.4%/28.5% QoQ/YoY, staff cost grew 20.6%/20.2% QoQ/YoY and other expenses grew 4.4%/34.9% QoQ/YoY

* Fee income: Fee income grew 6.3%/24% QoQ/YoY, where the YoY growth was driven by general banking fees, up 37% YoY

Our view – Bulk SA proves to be a fickle source of funding

CASA ratio has declined from 60.6% a year ago to 56.2%, currently, due to issues with bulk SA business: There has been some bleed in SA sourced from HNI and affluent customers. This is because these customers have moved to liquid funds and other fixed income instruments where the returns at the shorter end are higher, ranging between 5.75-6%. However, granular SA deposits below Rs 1mn have seen continued growth. Term deposits have grown well, displaying about 20% growth. There is going to be high focus on government agency business, which is expected to help deposits accretion.

Management reiterated their intention to increase the share of unsecured retail loans including microfinance: The share of unsecured retail including microfinance is 8.5% in the overall loan bookand management is comfortable in taking this share to mid-teens. In term of propensity for loan re-pricing, the share of floating rate loans is about 70% and, of the remaining fixed rate book, about 10% of loan book is having a tenure of less than 1 year.

Large corporate loans and agriculture loans were sluggish, whereas other segments contributed handsomely: Corporate loans de-grew -1.7% QoQ whereas agri loans grew 1.6% QoQ. On the other hand, credit cards, microfinance and PL+BL+CD jumped 15.9%, 21.8% and 13.6% QoQ, respectively. SME loans also grew well at 8.7% QoQ.

Sequential growth in employee expenses looked elevated due to negative one-off in the base: In 1QFY23, there was a writeback for retiral expenses, which was absent during this quarter. Non-employee expenses were driven by pushing for growth in both assets and liabilities.

We maintain ‘Add’ rating on KMB with a revised price target of Rs 2150: We value the standalone bank at 3.4x FY24 P/BV for an FY23E/24E/25E RoE profile of 12.0/13.4/14.2%. We assign a value of Rs 557 per share to the subsidiaries, on SOTP

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