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Result Highlights

* Asset quality: Annualized slippage ratio for 1QFY22 was elevated at 2.72%, with management flagging that a significant decline in slippages lay ahead

* Margin picture: Consolidated NIM at 4.66% was up 21 bps QoQ, with management making statements that imply NIM could inch up going forward

* Asset growth: Advances de-grew/grew -2.8%/6.6% QoQ/YoY driven by mortgage loans and SME loans

* Opex control: Total opex de-grew/grew -26.8%/23.4% QoQ/YoY as several costs absent last year showed up this year

* Fee income: Fee income declined -40.0% QoQ due to weakness in distribution and syndication fees, which de-grew -37.3% QoQ

Our view – Lower unsecured book stress to stand KMB in good stead

Most of the Rs 15bn worth of slippages emerged from the secured retail book, which augurs well from an LGD standpoint: Within the secured retail book, the tractor and commercial vehicle loan books were flagged as the main contributors. Uday Kotak “hopes and believes” that the third Covid wave will not be as severe as the second one. Total standalone provisions amounted to Rs 9.25bn, of which Rs 7.25bn were towards advances, translating to credit costs of 133 bps. Covid provisions remained intact at Rs 12.79bn. Total restructuring of all forms remained on the lower side at Rs 5.52bn or 25 bps of average advances.

Overall cost of deposits declined on sequential basis to a level that is one of the best in the industry: The intention of the bank is to keep chipping away (downward) at its SA rate premium of ~50 bps while not impacting the liability franchise. This process of tweaking the SA cost lower will happen while there will be a piecemeal improvement in asset yield, implying NIM could inch up going forward.

Mortgages loans and SME loans were the only two segments to grow sequentially at 1.6% QoQ and 0.9% QoQ: Weak overall loan growth continues to pose a question to KMB’s premium valuation. Tractor finance was the only segment to de-grow less than - 3.0%, among the de-growing segments, as it de-grew -1.4%. Management flagged improving conditions in June and then, further, in July.

We maintain ‘Add’ rating on KMB with a revised price target of Rs 1895: We value the consolidated bank at 3.5x FY23 P/BV for an FY22E/23E/24E RoE profile of 12.3/12.7/13.4%.

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