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Earnings gain traction

Slippages remain elevated due to impact of SREI Infra; PCR improves further

* CBK reported healthy earnings for 2QFY22, supported by higher treasury gains and recovery from the DHFL resolution. This recovery was predominantly utilised for making provision of INR32b towards one large corporate account (SREI Infra), and CBK now holds 50% provision for this stressed account.

* On the business front, the bank witnessed a decent sequential recovery in the growth of its Retail and Agri portfolios, while the weak trend in its corporate book continued.

* On the asset quality front, slippages were elevated at ~INR69b (annualised 4.2% of loans), mainly due to a large corporate account, while higher recoveries and upgrades aided an improvement of 8bp/25bp QoQ in the GNPA/NNPA ratio. Further, SMA overdue declined to ~2% of loans (v/s ~3.0% in 1QFY22), while restructured portfolio remained stable QoQ at 2.9% of loans. Overall, we expect CBK’s credit costs to moderate from FY23E onwards and estimate RoA/RoE of 0.8%/13.6% by FY24E. Resume coverage with Buy.

Business growth remains muted; Margin stable at ~2.7%

* CBK reported a PAT of INR13.3b (+200% YoY), supported by higher treasury gains of INR17.5b (95% YoY), a recovery in fee income (up 20% YoY), and controlled provisions.

* NII growth remained broadly flat YoY at INR62.7b. NIM (Global) improved by 1bp QoQ to 2.72% (target of 2.75% by FY22).

* Opex grew ~2.6% YoY to INR49.4b. C/I ratio was stable QoQ at 46.8%. As a result, PPoP grew ~22% YoY to INR56b.

* On the business front, loan growth was muted at 5.4% YoY (flat QoQ) to INR6.5t, with retail up 10.5% YoY (up 3.3% QoQ) and Agri up 13.9% YoY (3.1% QoQ) while MSME/Corporate grew 0.3%/0.7% YoY. Deposits growth stood at ~9% YoY with CASA growing 12% YoY. CASA mix stood at ~34.1% (broadly flat QoQ).

* On the asset quality front, slippages remained elevated at INR69b (annualised 4.2% of loans), mainly due to a large corporate account (SREI Infra) of INR32b. However, higher recoveries and upgrades aided an improvement of 8bp/25bp QoQ in the GNPA/NNPA ratio to 8.42%/3.21%. Thus, PCR improved by ~250bp QoQ to 63.9%. The bank carries a provision of 50% on the SREI Infra exposure which gives comfort regarding normalisation of credit costs.

* Total SMA overdue (0/1/2) declined to 1.97% of gross advances (v/s 3.0%, as on 1QFY22). Also, CBK’s restructured book remained stable at INR185.4b (~2.9% of loans) v/s INR183.2 (~2.8% of loans).

Highlights of management commentary

* CBK maintained its full year slippage guidance of less than INR150b but expects recoveries and upgrades to be higher than slippages.

* It expects a loan growth of 7.5% and retail loan growth of >10% for FY22E.

* NIM is expected to improve to more than 2.8% in 3QFY22.

Valuation and view

CBK reported healthy earnings for 2QFY22, supported by high treasury gains, improving fee income and a recovery from the DHFL resolution. On the business front, Retail and Agri exhibited a decent sequential recovery in loan growth, while the trend in the corporate segment remained muted. CBK’s asset quality was largely stable despite higher slippages (SREI Infra) and was supported by higher recoveries and upgrades. Also, the bank’s restructured portfolio remained stable QoQ at 2.9% of loans, while SMA overdue declined to ~2.0% of loans (v/s ~3.0% in 1QFY22). We expect CBK’s slippages to moderate as the corporate NPL cycle turns, driving a sustained reduction in its credit costs. We estimate RoA/RoE of 0.8%/13.6% by FY24E. We resume coverage with a Buy rating and a target price of INR270 (0.8x Sep-23E ABV).

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