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Asset quality stress peaks, earnings to pick up; retaining a Buy

A ~3.1bn Security Receipts (SR) write-down hit the bank’s earnings hard during the quarter. Excluding this, RoAs would have been 0.82%, vs. 0.56% reported now. With most of the pandemic-related stress already recognised/re-structured, the focus now shifts towards growth. Key positives were 1) a pick-up in loan growth, 2) moderation of slippages and 3) strong improvement in margins. With credit growth picking up and moderating credit costs, earnings are expected to normalise in the medium term. We retain our Buy rating, with a TP of Rs23, valuing the stock at 0.6x P/ABV on its FY25e book.

Asset quality peaks. GNPA decreased 19bps sequentially to 5.5%, driven by lower slippages and strong recoveries. Slippages were Rs3.3bn (1.9% of loans), lower than previous quarters and better than we expected. The re-structured book was Rs17.8bn (down 10.8% q/q). With most of the stress already delinquent/restructured and collections reaching pre-Covid levels, slippages ahead are expected to be moderate.

Earnings to normalise. A recent change in regulations on ageing provisions on SRs led to Rs3.12bn provisions, which led to a 26bp impact on RoAs for the bank. Ahead, mid-teen credit growth and higher margins (due to a change in the product mix) would keep operating profits strong. Since most of the stress has already been recognized, we expect credit cost to ease, leading to normalisation in profitability. We expect RoA to be 1% for SIB by FY25.

Valuation. Our Jan’24 target of Rs23 is based on the two-stage DDM model. This implies a 0.6x P/ABV multiple on its FY25e book. Risks: Higher stress arising from the corporate book; less-than-expected loan growth.

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