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A forgettable quarter; all eyes on revenue recovery

Result Highlights

* Asset quality: Gross slippages amounted to Rs 22.50bn (annualized slippage ratio of 3.6%) and recoveries and upgrades amounted to Rs 6.04bn

* Margin picture: NIM at 4.21% inched up 1 bp QoQ aided by a slightly higher rise in yield on assets compared with that for cost of funds

* Asset growth: Advances grew 3.7%/17.7% QoQ/YoY driven sequentially by Mid and Small corporates and few retail segments

* Opex control: Total opex rose 4.0%/20.1% QoQ/YoY, employee expenses rose 0.3%/8.6% QoQ/YoY and other expenses rose 5.3%/24.5% QoQ/YoY

* Fee income: Core fee income rose 8.6%/47.1% QoQ/YoY driven sequentially by general banking fees

Our view – Rise in net slippages underlines crystallization of stress

Slippages rise sequentially driven by restructured book slippages while recoveries and upgrades decline:

Gross NPA additions had amounted to Rs 20.88bn during 4QFY22, implying a sequential rise of Rs 1.6bn in 1QFY23. Recoveries and upgrades amounted to Rs 6.04bn in 1QFY23, implying a sequential decline of Rs 3.9bn. Credit costs for the quarter amounted to 50 bps on non-annualised basis but management stuck to a guidance of 120-150 bps annualised credit costs, which is a planning cycle 5 aspiration. The slippages from restructured book amounted to Rs 9.21bn for the quarter. The restructured book itself declined from 2.6% of loan book to 2.1% of loan book on sequential basis, with management stating that it would run down 70% of this book by the end of the current financial year.

NIM inched up 1bp as decline in cost of borrowings protected cost of funds from declining more than it did:

Overall yield on assets rose 7 bps QoQ to 8.35% on the back of repricing of assets. While cost of deposits rose 19 bps QoQ to 4.79%, the rise in cost of funds was significantly lower at 6 bps, to 4.14%, due to decline in cost of borrowings. Management reiterated that NIM would be in the range of 415-425 bps.

Management reiterated planning cycle 5 growth intent, hoping to achieve it via vehicle finance and microfinance:

The planning cycle 5 growth target is 15-18%. Management stated a growth of 16-18% is possible for vehicle finance whereas, microfinance book can grow at 25-30%. For the quarter, mid-corporate and small corporate loan growth was 4.7% and 11.0% QoQ, respectively. Among retail loans, commercial vehicle loans, utility vehicle loans, credit cards and the home+personal+gold loan bucket outperformed, growing 5.2%, 10.1%, 17.1% and 9.5% QoQ, respectively.

We maintain ‘Buy’ rating on IIB with a revised price target of Rs 1126:

We value the bank at 1.5x FY24 P/BV for an FY23E/24E/25E RoE profile of 13.5/14.4%/15.5%.

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