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Our view – Rundown of contingent provision buffer in the face of rising slippages can only be a short-term approach

The reported annualised credit cost for 9MFY24 is ~125 bps whereas the underlying credit cost is higher at ~151 bps and breaches guidance: Provisions for the quarter were Rs 9.34bn, down by -4.1% QoQ and -12.3% YoY, translating to an annualised credit cost of 119bps. Contingent provision buffer has declined from Rs 15.2bn to Rs 13bn during the quarter. The cumulative rundown of contingent provision over 9MFY24 has amounted to Rs 6bn. Slippages were elevated due to slippages in the vehicle finance book, which was due to adverse weather conditions with floods in south India and fog in north India. Gross slippage ratio for the vehicle finance book was higher at 0.73% in 3Q vs 0.64% in 2Q on non-annualised basis. Gross slippage ratio for the microfinance book was sticky at 0.55% in 3Q vs 0.57% in 2Q on non-annualised basis.

Deposits growth lagged loan growth, margin was stable while opex rose faster:Wholesale deposits have been let go of, with share of CD declining from 3% to 2%. On the loan to deposit ratio front, management stated that the bank is within the guided range of 86-90%, which is in line with the rest of the industry and they have not received any nudge from the regulator. The employee count rose 5% QoQ whereas 97 branches were added during the quarter, taking the overall branch count to 2828. Margin would remain in a range of 4.2-4.3% till the goal of deposit retailisation is achieved after which there could be scope for rise.

We maintain less-than-bullish ‘ADD’ rating on IIB with a revised price target of Rs 1925: We value the bank at 2.1x FY25 P/BV for an FY24E/25E/26E RoE profile of 15.6%/14.9%/15.2%

Result Highlights (See “Our View” above for elaboration and insight)

? Asset quality: Gross slippages amounted to Rs 17.65bn (annualized slippage ratio of 2.2%) and recoveries and upgrades amounted to Rs 8.38bn

? Margin picture: NIM at 4.29% was flat QoQ, as increase in cost of deposits was offset by increase in yield on advances

? Asset growth: Advances grew 3.7%/19.9% QoQ/YoY driven sequentially by Small corporates and select retail segments

? Opex control: Total opex rose 6.1%/27.6% QoQ/YoY, employee expenses rose 7.3%/28.5% QoQ/YoY and other expenses rose 5.6%/27.3% QoQ/YoY

? Fee income: Core fee income was up 2.1% QoQ and 11.5% YoY, where Forex, Cards and distribution fees and Loan processing saw healthy sequential growth

Exhibit 1: Result table

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