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Relative high slippage; business momentum on track IDFC

First posted decent Q3FY21 results with improvement in operating parameters and sequential rise in loan growth. On the asset quality front, there was little disappointment but long-term prospects remain intact. NII was up 13.7% YoY, 5.1% QoQ to | 1744 crore. NIMs expanded QoQ by 8 bps and 79 bps YoY to 4.65% despite interest reversals due to NPAs, supported by sharp rise in CASA deposits. Other income for the quarter jumped 31.1% YoY | 759 crore. Fee income increased 33% YoY to | 582 crore. Provisions for the quarter were at | 482 crore, up 123% QoQ owing to rise in proforma NPA. PAT was at | 129.5 crore for Q3FY21.

On the asset quality front, headline GNPA, NNPA declined from 1.62%, 0.43% to 1.33%, 0.33%, respectively; benefitted by standstill status. On a proforma basis, GNPA, NNPA ratio showed a steep rise sequentially and was up 231 bps, 144 bps to 4.18%, 2.04%, respectively. In the retail segment, proforma GNPA increased from 0.79% to 3.88% QoQ. The bank is holding decent amount of provisions against the same. Collection efficiency for standard loans was at 98% of pre-Covid levels. Restructured pool was at 0.8% of total funded assets. Restructuring request was at 1.8%.

The bank has made additional provisions related to Covid-19 amounting to | 390 crore during the quarter. As a result, the bank now has total Covidprovisions of | 2165 crore. The bank has provisions of 25% to total outstanding for a telecom exposure. Provision coverage including the general provision, Covid-19 provision, specific provisions on NPAs was 309% on reported NPA and 99% of proforma NPA.

Funded assets growth was flattish at 1% YoY but increased 3% QoQ to | 110469 crore. Retail book grew 24% YoY and 11% sequentially and was at | 66665 crore, driven by 28% YoY uptick in mortgage book, 21% rise in MSME loans and 22% increase in rural micro finance and KCC portfolio, while consumer loans also reported healthy growth of 22% YoY. On liabilities side, total deposits increased 23% YoY to | 84294 crore, driven by retail deposit that showed a strong growth of 100% YoY and 18% QoQ to | 58435 crore while wholesale deposits declined 34% YoY to | 25859 crore. CASA deposits saw strong growth of 150% YoY to | 40563 crore, due to which CASA ratio increased to 48.31% from 24.06% a year ago.

Valuation & Outlook

In terms of business, the bank seems to be on be on track to its long-term objectives of shifting loan mix in retail favour and higher retailisation of liability franchisee. The bank has been posting improving profitability in the past four quarters. Slippages came in higher in Q3FY21 owing to exposure to MSME segment, which was impacted by the pandemic. This is seen keeping credit cost elevated in next two to three quarters. With a prudent approach on the provisioning front and improving funding profile, we believe return ratios are set to improve meaningfully in the medium to long term with RoAs set to reach 1%. Thus, we value the bank at ~1.6x FY23E ABV with a revised target price of | 52 (earlier | 45). We maintain BUY rating.

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