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Result Highlights

* Asset quality: Gross slippages amounted to Rs 15.7bn (annualized slippage ratio of 2.4%) and recoveries and upgrades amounted to Rs 7.7bn

* Margin picture: NIM at 4.24% inched up 3 bp QoQ aided by a sequentially higher yield on advances and improving loan to deposit ratio

* Asset growth: Advances grew 4.9%/17.8% QoQ/YoY driven sequentially by Large and Small corporates and select retail segments

* Opex control: Total opex rose 5.0%/20.3% QoQ/YoY, employee expenses rose 11.3%/22.1% QoQ/YoY and other expenses rose 2.9%/19.7% QoQ/YoY

* Fee income: Core fee income rose 4.8%/24.3% QoQ/YoY driven sequentially by Forex, Cards and Distribution Fees

Our view – Cyclical stablilisation augurs well for now

Material sequential decline in gross slippage ratio and restructured book points to stablilisation in asset quality for now: Gross slippage ratio declined from 3.6% in 1QFY23 to 2.4% in 2QFY23. The restructured book declined to 1.5% of advances from 2.1% a quarter ago. All-inclusive provision coverage remained healthy with total loan related provisions amounting to 140% of GNPA and 3% of loan book. However, we note that microfinance remains 11% of total loan book and share of retail LCR is still low, which retains an inherent incremental cyclicality on both sides of the balance sheet.

Management enhanced loan growth guidance for the financial year to 20% plus, which is higher than the planning cycle target: PC 5 target is 15-18% and hence, the latest guidance is materially higher. A variety of loan segments are seeing materially improved traction. Vehicle finance book is up 4% QoQ and 13% YoY where double digit growth has been registered for the first time in 3 years. Microfinance disbursement for the quarter amounted to Rs 97bn, which is the highest ever and up 29% QoQ. The MFI book has risen 1% QoQ and 5% YoY. While the disruption from the new RBI directions is now behind the bank, the book growth has been sluggish due to run off. The non-vehicle non-MFI consumer finance book has grown 5% QoQ and 21% YoY and whereas the corporate loan book has risen 6% QoQ and 23% YoY.

Margin improved somewhat sequentially with guidance being reiterated: The 3 bps sequential expansion in NIM was driven by yield on loan book rising 12 bps QoQ. The corporate book yield was up 40 bps QoQ driven by small and mid-corporate yield. While consumer book yield was stable, management expects this yield to improve going forward. The drag from excess liquidity was lower during the quarter with loan to deposit ratio rising 43 bps QoQ. The guidance for NIM remains 4.15-4.25%.

We maintain ‘Buy’ rating on IIB with a revised price target of Rs 1500: We value the bank at 1.9x FY24 P/BV for an FY23E/24E/25E RoE profile of 13.8/14.4%/15.6%.

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