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‘Earnings normalization to take a few quarters’

Our view

USFB reported a larger-than-expected loss of Rs2.7bn in Q2 FY22 on account of substantial NPL addition, significant incremental restructuring and higher collections related costs. Non-NPL delinquent pool declined to 7% from 21% as of June aided by stronger collections (rollbacks from early buckets), substantial incremental restructuring activity (Rs9.6bn - 6.5% of gross adv.) and significant flow-forward to the NPL bucket (gross slippages at Rs6bn+). Gross NPL ratio rose by 200 bps qoq to 11.8%. Total restructured loan book stood at Rs14.8bn (10.2% of gross adv.) and it overlaps with the non-NPL delinquent pool by Rs1.7bn and with GNPLs by Rs4bn. The higher credit cost of Rs4.4bn in the quarter was driven by GNPL increase, sustenance of 75% PCR and provisions for large incremental restructuring. Basis concurrent collection trends (Oct CE at 107% incl. additional collections), substantially reduced SMA 1 & 2 buckets, encouraging repayment behavior of non-delinquent OTR pool and planned recovery actions in secured assets, the bank believes that GNPLs have peaked.

The growth in gross advances of 3.4% qoq/23.2% in Q2 FY22 was solely driven by nonMicro Banking products (MSE and Affordable Housing portfolios grew by 11-12% qoq) while the Micro Banking piece (Group + IL + Rural) was flat. Overall disbursements stood at Rs31.2bn (up 2.4x qoq) and were nearly back to pre-Covid run-rate. CoF declined by 20 bps qoq with sustained strong traction in CASA (share rose by 200 bps) and further improvement in retail deposits’ contribution.

In our view, profitability normalization is some quarters away for USFB and would be contingent on behavior of the OTR book (though bulk is non-overdue, the provision carried at 34% appears modest), write-off trajectory (would require residual provisions), extent of NPL recovery and growth in gross adv. Regulatory developments with respect to scheme of amalgamation with the holding company and senior management appointments would also be key monitorables from stock’s valuation perspective. Board has submitted names of two candidates to RBI for MD & CEO’s position, and other senior management positions like CFO, CRO, etc. are being closed. We maintain Reduce rating with a 12m PT of Rs23 and await more clarity on above mentioned areas.

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