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Moderate sequential rise in slippages on account of restructured book

Result Highlights

* Asset quality: Gross slippages amounted to Rs 4.63bn (annualized slippage ratio of 1.2%) and recoveries and upgrades were healthy at Rs 2.81bn

* Margin picture: NIM at 3.22% was up 6 bps QoQ on account of a 2bps QoQ increase in yield on advances and an -8 bps QoQ fall in cost of deposits

* Asset growth: Advances grew 4.8%/16.4% QoQ/YoY driven sequentially by commercial banking (CoB) and corporate loans

* Opex control: Total opex fell/rose -9.1%/16.1% QoQ/YoY, staff expenses fell - 21.6% /5.5% QoQ/YoY and other expenses rose 5.4%/44.3% QoQ/YoY

* Fee income: Commission, Exchange, Brokerage fees fell/rose -1.8%/77.5% QoQ/YoY. The YoY growth has a low base effect due to the second Covid wave

Our view –

Moderate sequential rise in slippages on account of restructured book

Slippages from restructured book are well within what had been guided for: The slippage from the restructured book amounted to Rs 1.1bn, most of it coming from the retail and business banking restructured book. This was already budgeted as it had been previously flagged that 20-25% of the restructured book will slip. Management guided that the absolute level of slippages for the bank in FY23 would be similar to levels seen in FY22 and hence, would be about Rs 18bn. Standard restructured book stood at Rs 33.66bn or 2.2% of advances.

While there are several moving parts, there is no change to NIM guidance as such: The rise in yield on advances seemed tepid given the context of 48% of loan book being EBLRlinked. SA rate, for its part, although repo rate-linked, rose 25 bps as the ALCO adjusted the discretionary spread accordingly. There was, in fact, a decline in cost of deposits driven by re-pricing of long-term deposits in the 3-5 year maturity bucket and, also, maturation of certificates of deposit. Management guided for a NIM of 325-327 bps.

While wholesale segments somewhat outperformed sequentially, core retail loan growth was also healthy: Core retail loan growth, i.e. retail excluding agri and business banking, was 4.2% QoQ. This was driven by 14.2% QoQ growth in gold loans and a 5.2% QoQ growth in auto loans. LAP loan growth was also reasonable at 3.7% QoQ.

We maintain ‘Buy’ rating on FED with a revised price target of Rs 142: We value the standalone bank at 1.2x FY24 P/BV for an FY23E/24E/25E RoE profile of 13.5/14.4%/15.4. We assign a value of Rs 7.1 per share to the subsidiaries, on SOTP.

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