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Improving confidence around deposit franchise and credit cost trajectory

IIB Q3 FY21 earnings missed expectation on conservative provisioning and lower‐than‐ estimated fee and treasury income. Loan growth of 3% qoq driven by revival in consumer finance segment (barring CV and LAP, most products recorded growth uptick) was in‐line with expectations, while strong and granular deposit growth continue to surprise (5% qoq ‐ CASA sustained at 40%). Despite funding cost benefits, the NIM was stable on account of interest reversals on proforma slippages. Overall asset quality performance was resilient with proforma slippages at Rs25bn (1.2% of adv.) and invoked restructuring at Rs12.5bn (60bps). Collection efficiency in the perceived vulnerable portfolios of Microfinance, Vehicle Finance and Gems & Jewellery has demonstrated encouraging recovery in recent months. Many of the weak accounts in Microfinance and Vehicle Finance portfolios slipped in Q3 (formed 40% of proforma slippages) and some more could slip in the current quarter. In other retail products, the overdues buckets have been coming down. The bank is carrying significant provisions on the recognized stress – 85% on reported GNPLs, 62% on proforma slippages and 32% on restructured portfolio, and in addition has provisions of 25‐30 bps. In all likelihood, Q4 should be the last quarter of heady provisions.

We raise ABV estimates by 2‐3% assuming better‐than‐earlier growth and credit cost outcomes. We believe that RoA delivery in FY22/23 could positively surprise on the current consensus estimates, and this could come from a strong recovery in vehicle finance (29% of adv.) and Microfinance (11%) portfolios. Based on increased confidence around the deposits franchise and credit cost trajectory, we upgrade rating to BUY (from ADD) and raise 12m PT to Rs1,070. 

Management Commentary

Guidance (medium to long term)

* Loan mix: retail (55‐60%) and wholesale (38‐45%).

* PPoP to be >5%, NIMs within 415‐425bps and RoA within 1.4‐1.7%.

* Remain conservative on credit cost (shall provide in Q4FY21 as well).

CV portfolio

* Share of performa slippages and restructurings stood at Rs502crs and Rs10.2bn respectively.

* On demand side, CV segment is ridden with overcapacity currently, shall normalise in near term.

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