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Asset quality broadly stable; earnings outlook getting strengthened

? FB reported a PAT of ~INR3.7b in 1QFY22, led by strong other income (recovery from a written-off account and treasury gains of INR2.6b). It prudently deployed these gains towards provisions, which stood elevated at INR6.4b (63% YoY increase),to further strengthen its Balance Sheet.

? The bank posted a moderation in business growth, with loans across most segments declining sequentially. Deposit growth was muted, while the CASA ratio touched ~35% (record high levels). The share of Retail deposits rose to 93% of total deposits.

? On the asset quality front, higher disruption due to the second COVID wave caused elevated slippages of INR6.4b (annualized ~2% of loans), though higher write-offs led to stable asset quality ratios. Provision coverage remains stable ~66% (highest among midsize Banks). The restructured book increased to ~1.9% of loans (v/s ~1% of loans in FY21). It expectsto restructure loans worth INR4b (~0.3% of loans) over 2QFY22. Collection efficiency remained stable at 95%.

? We maintain our earnings for FY22E/FY23E and estimate RoA/RoE at 1.1%/13.8% for FY23E. FB remains our top pick among midcap Banks.We maintain our BUY rating with a TP of INR110 per share (1.2x FY23E ABV + INR9/share from subsidiaries/JVs).

Treasury gains/recovery from written-off accounts prudently deployed for provisioning; PCR stable ~66%

? FB reported a net profit of ~INR3.7b (largely in line) as it prudently deployed higher treasury gains (~INR2.6b) and recovery from written-off assets (~INR1.4b) towards provisioning, which stood elevated at INR6.4b (up 63% YoY).

? NII grew by ~9% YoY (~INR14.2b, flat QoQ) affected by muted loan growth and elevated slippages,which led to interest reversal of INR650m. Margin fell by 8bp QoQ. Core fee income declined by 34% QoQ, due to a drop in disbursements, while strong treasury gains (~INR2.6b) and recovery from written-off accounts drove ~33% YoY growth in other income. Total revenue increased by 16% YoY.

? Opex grew ~9.5% YoY. C/I ratio fell to ~45% (v/s ~53% in 4QFY21). PPOP grew ~22% YoY. ? On the business front, loan growth fell ~2% QoQ (up 7% YoY) to ~INR1.3t, with Retail/SME declining by 3% each and Corporate falling by 2%.

? Deposit base grew ~9% YoY, led by CASA growth of ~19% YoY. The CASA ratio stood at 34.8% (fresh high), with Retail deposits at 93%.

? On the asset quality front, higher disruption due to the second COVID wave caused elevated slippages of INR6.4b (annualized ~2% of loans), with higher slippages from the Agri/SME portfolio. Higher write-offs at INR4.4b kept asset quality ratiosstable. The GNPA/NNPA ratio increased by 9bp/4bpQoQ to ~3.5%/~1.2%, while PCR stood largely stable ~66%. Restructured book increased to ~INR24.1b (~1.9% of loans) v/s INR14.1b (~1% of loans) in FY21. Collection efficiency was stable at 95%, despite a challenging environment, boding well for asset quality trends.

Highlights from the management commentary

? Around 60% of Retail slippages came from the Home loan portfolio, with the rest mainly from the LAP segment.

? FB expects slippages in FY22 to remain at a similar trajectory as the last two years.

? Its restructured book is fully secured. The bank expects LGDs to remain low. Most of its Retail restructured book constitutes Home loans, LAP, etc. Collections efficiency in this portfolio stands at 95%, which is in line with its other portfolio.

Valuation and view

FB reported a slight moderation in business growth owing to a challenging environment and lockdowns across several states. However, the bank’s liability franchise remains strong, with Retail deposit mix ~93% and CASA ratio at a record high of ~35%. On the asset quality front, slippages stood elevated from the Retail/Agri/SME segments as the second COVID wave has severely affected the Selfemployed segment and impacted the rural economy as well. The bank prudently utilized higher treasury gains/one-off recovery from written-off accounts towards provisions to further strengthen its Balance Sheet and stabilize PCR. We maintain our earnings and estimate RoA/RoE at 1.1%/13.8% for FY23E. We reiterate our BUY rating with a TP of INR110 per share (1.2x FY23E ABV+ INR9 per share from subsidiaries/JVs).

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