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Gold loans witnessing robust traction; business granularity improving

NRI franchise steady: Remittance crosses the INR1t milestone (17.5% share)

* In its FY21 Annual Report, FB highlighted the progress it is making in strengthening the Balance Sheet and the focus it is laying on building its Gold loans portfolio, along with the newly launched Credit Card product. Higher focus is placed on leveraging its distribution base through the RM model, which will enable further improvement in the C/I ratio.

* The bank remains focused on granular lending, led by Retail/SME segment, within which Gold loans witnessed robust traction (+70% YoY). Retail mix has now improved to 33% v/s 27% in FY18.

* Liability franchise continues to remain robust and granular, with the concentration of top 20 deposits declining to 4.8% (~120bp YoY decline).

* FB’s exposure to the top 20 borrowers increased marginally by 10bp to 10.4%, while RWA growth has been under control, resulting in moderation in RWA density.

* The business outlook remains modest. The bank would grow in a calibrated manner, and the emphasis will continue to be on sustained earnings. The bank has recently announced a capital infusion of INR9.16b (from IFC) and proposed to augment its capital base further via various routes even as the current CAR remains comfortable.

* We estimate FB to deliver an FY23E RoA/RoE of 1.1%/14.3% and maintain Buy with a TP of INR110 (1.1x FY23E ABV).

Asset growth led by Retail; Gold loans witness robust traction; launches Credit Cards for employees

The overall loan book grew 8% YoY, led by Retail, which grew 19% YoY. Retail now forms 33% of total loans v/s 27% in FY18. Within Retail, Gold loans grew 70% YoY to INR158b. Agri portfolio grew 23% YoY and business banking rose 13%, while the Corporate segment declined by 4%. The business outlook remains modest. The bank would grow in a calibrated manner, and the emphasis will continue to be on sustained earnings. The bank has recently announced a capital infusion of INR9.16b (from IFC) and proposed to augment its capital base further via various routes, even as current CAR remains comfortable.

* Gold loans are gaining robust traction, faster than other Retail segments. The bank has increased its focus on the Gold loan portfolio and offers KCC gold, Agri Gold loans, Business Gold loans, Overdraft loans, EMI Gold loans, and Bullet Repayment loans to suit the needs of various sections of the society. It also launched a digitally-powered doorstep Gold loan services in association with a fintech company to enhance the ease of availing such loans.

* In the CV/CE business, it signed MoUs with OEMs like Tata Motors, Daimler India, and Mahindra Truck & Buses to be a preferred financier for them.

* The bank has launched its Credit Card business for the internal CUG team in Mar’21. The card is being offered to existing customers in a completely digital way. It is issued and activated through a three-click process. The virtual card is delivered to the applicant through FedMobile within seconds, followed by a physical card.

Robust liability franchise; NRI deposits growing at a healthy pace; remittance business crosses the INR1t milestone

FB has built a strong liability franchise with a sharp focus on a granular book. As a result, CASA + Retail TD forms ~90% of total deposits. Total deposits grew 13% YoY to INR1.7t in FY21, within which NRE deposits grew 11.8% YoY to INR640b (~37% of total deposits). NRE savings deposits grew ~19% YoY to INR183b. Within the NR business, the personal inward remittance business crossed the INR1t milestone in FY20-21 and registered a growth of 15% YoY, with a market share of ~17.5%. The bank has increased its focus on the HNI segment. Share of CASA from the HNI segment to total CASA improved to ~45.25% in FY21 v/s ~40.7% in FY20. It has a total HNI customer base of ~245k (~25% YoY growth).

Deposit/NPA concentration improves; loan/exposure concentration stable

FB has successfully improved its concentration ratios. Concentration of the top-20 advances/exposures increased marginally (8-10bp) to ~10.2%/10.4%. Concentration of the top 20 depositors fell ~121bp to 4.8%. The bank’s LCR remains strong at 212%. Concentration of the top four NPA accounts moderated to ~13.1% v/s 14.5% in FY20. The share of Commercial Real Estate loans declined by ~7% in FY21 after remaining stable over FY18-20. Total SR book stands at INR4.9b, with provisions of INR3.3b against it. The bank holds standard asset/floating provision of INR7.36b/INR127.5m.

Other key highlights from the Annual Report

* ESOP: The bank granted ~16.9m options in FY21 (v/s ~30.5m in FY20), while the options that were exercised stood ~65k. Total options that lapsed/forfeited stood ~19m.

* Bancassurance fee: This increased 9% YoY to INR822m and forms ~8% of the total fee. The growth in banca fee is primarily led by sale of life insurance policies (+7% YoY), while fees from mutual funds grew 3x to INR60m. Around 57% of total banca fees accrues from the sale of life insurance policies. Fees from the sale of non-life insurance policies declined by 14% YoY.

* Contingent liabilities for the bank grew ~6% in FY21 (~12% CAGR over FY16–21). Contingent liabilities, as a proportion of total assets, moderated to 19% v/s 23% in FY16.

* Remuneration: Average salary hike in FY21 was 16.7%, while the percentage increase in remuneration of the MD and CEO/ED stands at 2%/2.5%. The ratio of remuneration of the MD and CEO to that of median employees was 24.8x, while that of the ED/CFO was 12.5x/11.7x.

* The discount rate used towards gratuity/pension plan is 6.95%/6.82% (v/s ~6.85%/6.84% in FY20), while the expected rate of return on plan assets towards gratuity plans is ~6% (v/s 7.34% in FY20) and pension plans is ~7.14% (v/s ~7.49% in FY20).

* In FY21, there was a change in accounting estimates as the bank has revised the useful life of certain fixed assets due to which the depreciation charge was lower by INR221.2m.

* Frauds: In FY21, the number of frauds declined to 344, with the total amount at INR7.24b (INR1.9b net of recoveries/write-offs).

Valuation and view

Over FY21, FB delivered a strong core operating performance and healthy business trends across both advances and deposits. Retail loan growth is showing a healthy revival, led by robust trends in Retail loans (Gold, LAP, and Housing). The bank’s liability franchise remains strong, with a Retail deposit mix ~90% and healthy CASA growth, which will continue to aid margin. Asset quality trends were broadly stable QoQ, while slippages in FY21 were broadly similar to pre-COVID levels v/s a much higher deterioration seen in some other midsize Banks. The drop in collection efficiency in Apr-May’21 was broadly similar to other Banks. We expect FY23E RoA/RoE at 1.1%/14.3%. We reiterate our Buy rating with an unchanged TP of INR110 per share (1.1x FY23E ABV).

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