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Elevated slippages disappoint

ESFB delivered a 3-4% NII/PPOP miss and 28% lower PAT vis-a-vis our expectations. Key negative was higher slippages from restructured pool and thus a higher credit cost. Redeeming factors were strong disbursements, growth traction across products, sustenance of CASA (amid accelerated deposits mobilization) and enhancement of PCR. In the quarter, the bank had one-off opex benefit of Rs310mn from reversal of employee-related provisions.

Strong asset/liability growth and healthy texture

Disbursements were stable qoq across products, not just depicting resilient demand but also bank’s strong execution and distribution. Growth in the quarter was led by granular segments (SBL, VF, AHL and MFI), whereas MSE Finance and NFC lending portfolios witnessed de-growth. Management remains confident about delivering around 30% loan growth in FY23. Some of the drivers would be a) no demand slowdown across segments from higher inflation/rates, b) tapping of more formal customer segment in SBL/LAP, c) strong replacement demand in vehicle finance segment and d) distribution expansion for affordable home loans. The bank was able to match deposits growth with its asset growth through sustained robust mobilization of SA and by raising the quantum of bulk deposits (though its contribution still lower in overall deposits at 14%)

Significant flow from OTR and increased PCR drive higher credit cost

NPL addition was near Rs3bn (5.5% ann. slippage ratio), and slippages from OTR pool contributed near 50% (Rs1.56bn v/s Rs2.8bn in preceding quarter). OTR slippages were seen from all product segments. Even slippages from non-OTR std. portfolio were higher than preceding quarter. Bank expects slippages to moderate/normalize in coming quarters as a) flow from OTR pool should subside (weak/more stressed account have already slipped), b) X bucket collection efficiency across products is at prepandemic level (new delinquency creation already normalized) and c) collections on non-OTR overdue accounts has stabilized. Management still believes that credit cost can be contained around 1.5% in FY23 (assuming stable PCR) with significant moderation expected in H2. POS loss in repo cases in VF segment has been improving and there has been no significant loss on settlement/recovery in SBL cases

Our FY23/FY24 estimates have been marginally downgraded. We continue to expect 2%+ RoA and 16%+ RoE in FY24, mainly on normalization of credit cost and improvement in cost/income ratio. Valuation is inexpensive at 1.1x/7x PABV/PE ratio; however, stock’s re-rating is contingent on better profitability outcomes in ensuing quarters and clarity on management transition. Retain BUY.

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