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Operating performance showing recovery signs

Slippages/credit cost likely to stay elevated; restructured book ~2.7%

* INBK reported healthy operating performance supported by modest opex and higher other income, even as business growth remains muted. NIM, however, expanded 51bp QoQ to 2.85% (higher slippages in 4QFY21). Provisions continue to remain elevated, despite the bank reporting healthy RoA/RoE of ~0.8%/15% in 1QFY22.

* Asset quality was largely stable even as slippages came in elevated (~5% annualized). Collection efficiency declined in 1QFY22, while witnessing improving trends from Jul’21. Restructuring book stands ~2.7% of loans, while the high SMA book (~7.6%) would keep asset quality under check.

* We expect business growth to pick up gradually, which is likely to support margin. However, slippages are likely to remain elevated, which would keep credit cost elevated. We estimate RoA/RoE of 0.8%/14.5% by FY23E. We resume coverage with a Buy rating.

Business growth modest; slippages remain elevated; PCR ~66.5%

* INBK reported a PAT of INR11.8b (+220% YoY), supported by tax reversals of INR3.2b, even as provisions stood elevated at INR26b (+22%). NII grew 3% YoY (+20% QoQ) to INR39.9b, while NIM improved 51bp QoQ to 2.85%.

* Core fee income grew 5% YoY (-29% QoQ) impacted by lower business volumes, while total other income grew 41% YoY (+8% QoQ) to ~INR18.8b. This was mainly led by recovery from bad debts and a rise in FX income.

* Opex declined by 2% YoY to ~INR24b. PPOP grew strongly (+26% YoY, +36% QoQ) to INR34.7b. C/I ratio improved 900bp QoQ to 40.9%.

* Loan growth was modest at 7% YoY (flat QoQ) to ~INR3.6t, led by muted growth in the Corporate book (-1% QoQ), while Retail (+17% YoY), MSME (+12% YoY), and Agri (+17% YoY) book continued to show healthy trends. Deposits grew 10% YoY (flat QoQ), led by a 12% rise in term deposits. CASA deposits grew 9%. CASA mix stood at 40.9% (-140bp QoQ).

* Slippages stood elevated at INR44b (~5% annualized), led by the MSME segment, while higher upgrades (INR16.5b) and write-offs (INR28b) resulted in 2% QoQ decline in GNPA. GNPA ratio declined by 16bp QoQ to 9.7%, while NNPA rose to 3.5% (+10bp) as PCR stood at 66.5% (82% including technical write-offs).

* SMA book remains elevated ~7.6%, while total restructuring is expected ~2.7% of total loans. Collection efficiency witnessed a decline over 1QFY22, with Retail/MSME/Agri/Corporate at 85%/78%/88%/97%.

Highlights from the management commentary

* Collection efficiency dipped over May-Jun’21, but witnessed an uptick from Jul’21 onwards. It expects CE to cross 90% by the end of Jul’21.

* The bank expects minimum growth (~10% YoY) on the advances front. NII is expected to pick up going forward and would support margin. The management is looking to achieve a NIM of 3%.

* The target is to keep the slippage ratio at less than 3% and credit cost below 2%.

Valuation and view

INBK reported a healthy operating performance, supported by modest opex and higher FX income, while business growth remains muted. The bank expects growth to pick up, led by the RAM segment, while the Corporate book would witness a gradual recovery. This, along with the low cost of funds, would support margin. Asset quality was largely stable, despite higher slippages (led by the MSME segment). However, lower collection efficiency, along with a high SMA book (7.6% of loans), would keep slippages elevated. We estimate credit cost to stay elevated at 2.1%/1.8% for FY22E/FY23E. We project loan growth at 9%/12% for FY22E/FY23E and estimate RoA/RoE of 0.8%/14.5% by FY23E. The bank is trading at reasonable valuations of 0.5x FY23E ABV. We resume coverage with a Buy rating and a TP of INR175 per share (0.6x FY23E ABV).

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