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To focus on scalability with sustainability and profitability

The bank hosted an analyst meet to showcase its reorganized management profile, give an update on Planning Cycle 5 and provide some insights into Planning Cycle 6. The KTAs:

*  Well on course to achieve PC 5 goals despite Covid shock; PC 6 to focus on building scale with profitability and sustainability: Under the Planning Cycle (PC) 5, the bank has fortified its retail liability franchise, fine-tuned its corporate banking business, launched the holistic Bharat Banking model, ramped up digital compatibility and initiated new growth boosters (Home/gold loan) and completed management reorganization. Under PC 6, it plans to further improve its CASA ratio to >45%, re-accelerate growth across consumer/corporate banking segments with continued focus on market share gains, granularization & higher RoRWA, and launch investment/para-banking (Broking, AMC, etc.), thus delivering PPOP/loans of >5.5% on a sustainable basis.

* Re-oriented Consumer/Corporate banking business ready to drive growth/RoRWAs up: The bank has largely fine-tuned its corporate banking business with incremental focus on the granular book and customer wallet share to drive RoRWA up. It has reduced the NFB exposure and believes that the earlier strategy to mop-up aggressive fees at the cost of quality is not sustainable. It believes that the consolidation phase is over and the bank will look at re-growing the corporate book with asset-quality issues largely behind. None of the corporates in the Gems & Jewellery book has slipped into NPA/RSA or even SMA 2. That said, it will aim for retail:corporate share of 60:40 in the PC 6 cycle. Within retail/consumer banking, the bank plans to accelerate growth in its traditional growth segments (VF, MFI) recovery from its cyclical lows and also ramp up used vehicle, affordable housing, gold, tractor, SME and individual MFI loan segments. The focus remains on granularizing retail deposit base and will implement a branch + digital acquisition strategy. Additionally, it would focus on further strengthening the NRI and corporate salary segment to drive CASA beyond 45%.

* Turning from micro-lender to micro-banker: The bank believes that both asset-quality and management issues in the MFI business are largely behind it. IIB is now looking to accelerate growth. It had largely followed a JLG model, but now would be looking at lending to individuals with higher ticket sizes, similar to other players, which should support growth. In line with other players, the bank has raised rates by 50-75bps to support margins. As a strategy to capture the MFI ecosystem, the bank has mobilized nearly Rs15bn of deposits and plans to cross-sell consumer durables, TW and other loans. It plans to emerge as a Bharat Super Shop, where it will scale up the micro-retailer loan book (Rs19.4bn), mobilize current deposits, and also capture the payment ecosystem.

* Retain Buy: We believe IIB has largely recovered from the asset-quality shock and now plans to accelerate credit growth backed by a better retail liability profile and thus drive scale with profitability (higher RoAs>1.7%) on a sustainable basis. The bank’s MD clarified that there is no adverse view from the RBI on recent MFI-related issues and his term extension (beyond March 2023) by the board will be taken up in October, while final clarity from the central bank should emerge around early-Q4. That said, the bank has credible management back-up available, including new Deputy CEO Mr. Arun Khurana. Retain Buy with a TP of Rs1,275 (valuing core bank at 1.7x Jun’24E ABV). Key risks: Delayed assetquality normalization and senior management attrition.

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