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Result Highlights

* Asset quality: Annualized slippage ratio for 1QFY22 was particularly elevated at 5.2% but provisions remained under relative control at Rs 18.4bn, down -1.2% QoQ

* Margin picture: NIM at 4.06% was down 7 bps QoQ, with the bank enhancing excess liquidity by Rs 120bn over the quarter

* Asset growth: Advances de-grew/grew -0.9%/6.4% QoQ/YoY driven by wholesale loans as consumer finance de-grew QoQ

* Opex control: Total opex de-grew/grew -1.7%/12.6% QoQ/YoY as other opex degrew/grew -3.1%/13.5% QoQ/YoY and staff cost grew 2.2%/10.2% QoQ/YoY

* Fee income: Fee income declined -19.5% QoQ due to weakness in business activity

Our view – Relatively healthy pre-existing provision cover meant provisions did not spiral out of control

All-inclusive provision cover of 122% over GNPA as of 4QFY21 meant provisions remained under relative control: Relatively higher risk loan book expectedly threw up elevated slippages, of which 38% emerged from the vehicle finance book, 24% from the microfinance book, 22% from other retail and the balance from corporate book. Upgrades were reasonable at Rs 8.45bn, of which Rs 4.43bn came from the microfinance book. Restructuring rose to 2.7% of advances with Restructuring 2.0 contributing 40 bps to the rise, whereas 50 bps was due to corporate accounts from the pre-existing pipeline. Provisions for the quarter contained discretionary contingent standard asset provisions worth Rs 4.5bn, taking Covid provisions to Rs 20.5bn, as all-inclusive cover on GNPA remained healthy at 123%. Management stated that credit costs should be in the 160- 190 bps range once the pandemic impact recedes.

Management has stuck to its earlier NIM guidance of 415-425 bps, which seems reasonable to us: Cost of deposits declined 6 bps QoQ to a historic low of 4.97%. Management stated that there is still legroom to tweak premium SA rates lower to a 3.5% ballpark. Furthermore, while excess liquidity dragged margin, management stated that there is recourse to wind this down and take CD ratio to 85-90%.

Management retained planning cycle 5 loan growth CAGR guidance of 16-18% over the next 2 years: Wholesale loans grew 1.5% QoQ driven by large corporate loan growth of 5.5% QoQ. Consumer finance de-grew -2.7% QoQ, with tractor finance being the only sub-segment to display sequential growth at 2.9% QoQ. Encouragingly, vehicle finance book was on track to revert to pre-Covid levels of activity by the end of July.

We maintain ‘Buy’ rating on IIB with a revised price target of Rs 1201: We value the bank at 1.8x FY23 P/BV for an FY22E/23E/24E RoE profile of 11.8/14.0/14.6%.

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