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RoA progression on a fast track

Robust NII and controlled provisions drive earnings

* FB reported a strong quarter with a PAT of INR8b (up 54% YoY and 13% beat), aided by lower provisions and NIM expansion even as the bank prudently increased the PCR to ~70%. Margin improved 19bp QoQ to 3.49%.

* Gross advances grew 19.1% YoY, led by a broad-based pickup across all business segments. Deposit growth was healthy, led by strong traction in term deposits, while CASA ratio moderated to 34.2%.

* Fresh slippages came in at INR4.1b (~1.1% of loans), led by a QoQ increase in the Retail segment. GNPA/NNPA ratio moderated to 2.43%/0.73%, while restructured loans too improved 20bp QoQ to ~1.8%.

* FB reported a RoA/RoE of 1.33%/15.91% in 3QFY23. We raise our estimates by 5-7% as we build in higher margins and provisions. FB remains our preferred pick among mid-sized banks and we estimate it to deliver a RoA/RoE of 1.3%/15.2% in FY25. We reiterate our Buy rating on the stock.

Healthy growth across segments; margin improves 19bp QoQ to 3.49%

* FB reported a net profit of ~INR8.0b (up 54% YoY; 13% beat), driven by lower provisions, which declined 26% QoQ. NII grew ~27% YoY to INR19.6b (up 11% QoQ, 4% beat) as margins expanded 19bp QoQ to 3.49%. For 9MFY23, NII/PPoP/PAT grew 20%/17%/56% to INR53.2b/INR34.6b/INR21.1b.

* Core fee income grew 28% YoY (up 4% QoQ), led by a healthy business activity, while treasury reported a loss of INR90m as the bank provided additional investment provision of INR476.1m on the SR book.

* Opex grew at a modest ~10% YoY, thus C/I ratio stood stable at 48.8% QoQ. PPOP grew a healthy ~39% YoY (core PPOP grew 52% YoY).

* On the business front, gross advances grew 19.1% YoY and 4.3% QoQ to INR1.71t, led by a broad-based pickup across segments. Its corporate portfolio grew 6% QoQ, while the Retail, SME, and Agri grew 3-5% QoQ. Deposits grew 15% YoY, within which, CASA grew ~7% YoY. The CASA ratio moderated to 34.2% (-220bp QoQ), while Retail deposits stood at 90%.

* GNPA/NNPA moderated 3bp/5bp QoQ to 2.43%/0.73% in 3QFY23. This was supported by a healthy recovery and upgrades, while slippages came in at INR4.1b (~1.1% of loans). PCR improved 170bp QoQ to ~70%. Restructured loans declined to ~INR30.4b (~1.8%).

Highlights from the management commentary

* The bank has earlier guided for exit RoA of 1.25% for FY23 and has beaten the same in 3Q. The management expects the RoA for 4Q to remain similar or slightly better. RoA for FY23 is likely to be ~1.25% with an endeavor to improve by 10bp in FY24.

* The bank expects full-year margin for FY23 to be ~3.35-3.4% and similar for FY24. Although margin for 4Q could see some moderation, it is likely to remain healthy.

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