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Robust performance; RoA progression on a fast track

* FB reported a strong quarter with a PAT of INR7b (up 53% YoY and 17% beat), aided by NIM expansion and higher ‘other income’ even as the bank prudently increased the PCR to ~69%. Margin improved 8bp QoQ to 3.3%.

* Gross advances grew 19.4% YoY, led by a broad-based pickup across all business segments. Corporate grew the fastest at 21% YoY, followed by SME/ Retail/Agri at 20%/18%/18%, respectively. Its CASA ratio stood at ~36.4%.

* Slippages (including an increase in the balance of existing NPAs) moderated to INR3.9b (~1.1% of loans), led by a 40% QoQ decline in the Retail segment. GNPA/NNPA ratio moderated to 2.5%/0.8%, while restructured loans improved 20bp QoQ to ~2%.

* FB remains our preferred pick among mid-sized banks and we estimate it to deliver an RoA/RoE of 1.2%/14.2% in FY24. We reiterate our Buy rating on the stock.

Strong growth across segments; margin improves 8bp QoQ to 3.3%

* FB reported a net profit of ~INR7b (up 53% YoY; 17% beat), aided by higher NII, which grew ~19% YoY to INR17.6b (up 10% QoQ, 4% beat). Margins thus expanded 8bp QoQ to 3.3%.

* Core fee income grew 38% YoY (+18% QoQ), led by a healthy business activity, while treasury income too came in strong at INR700m, which the bank prudently used to improve its PCR.

* Opex grew at a modest ~9% YoY, thus C/I ratio improved to 48.9% v/s 52.7% in 1QFY23. PPOP grew by a healthy ~33% YoY (core PPOP grew 44% YoY).

* On the business front, gross advances grew 19.4% YoY and 6.2% QoQ to INR1.64t, led by a broad-based pickup across segments. Its corporate portfolio grew 7% QoQ, while the Retail, SME, and Agri grew 5-6% QoQ. Deposits grew 10% YoY, within which, CASA grew ~11% YoY. The CASA ratio moderated to 36.4% (-40bp QoQ), while Retail deposits stood at 93%.

* GNPA/NNPA moderated by 23bp/16bp QoQ to 2.5%/0.8% in 2QFY23. This was supported by a healthy recovery and upgrades while slippages too moderated to INR3.9b (~1.1% of loans). PCR improved 290bp QoQ to ~69%. Restructured loans declined to ~INR32.7b (~2.0%).

Highlights from the management commentary

* Margin for FY23 is likely to be ~3.3% from its earlier expectation of 3.25%.

* RoA expansion is on track and ahead of the bank’s expectation. The bank expects FY23 RoA to be 1.2% (up from earlier estimate of 1.15%) and expect it to exit FY23E with ~1.25%

* 65% of the book is linked to EBLR or MCLR and the bank passes the increase in Repo rate instantly. Thus, margins should remain on a positive trajectory, supported by increase in yields and lower interest reversals.

Valuation and view

FB reported a strong 2QFY23, with a sharp beat in net earnings, driven by robust income growth. Both NII and fee income have shown strong momentum, backed by healthy recovery in business growth and re-pricing of advances portfolio. Liability franchise remains strong, with a retail deposit mix at ~93% and CASA ratio at ~36.4%. Headline asset quality ratio saw a sharp improvement, led by healthy recoveries and upgrades and controlled slippages. We raise our FY23/FY24 earnings estimate sharply by 10%/9%, factoring in higher NII and ‘other income’ and expect a RoA/RoE of 1.2%/14.2% in FY24. We reiterate our Buy rating with a revised TP of INR155 (1.4x FY24E ABV).

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