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

* Asset quality: Gross slippages were under control atRs 540mn (annualized slippage ratio of 1.0%) and recoveries and upgrades were healthy at Rs 400mn

* Margin picture: NIM was down -56bps QoQ to 4.84%, due to sequential fall in yield on advances as against rise in cost of deposits

* Asset growth: Advances grew 5.5%/27.4% QoQ/YoY driven on YoY basis by Gold loans and Retail loans

* Opex control: Total opex rose 4.4%/49.4% QoQ/YoY, employee expenses fell/rose -3.4%/36.2% QoQ/YoY and other expenses rose 16.1%/69.7% QoQ/YoY

* Fee income: Fee income rose 26%/65.6% QoQ/YoY where the sequential growth was driven by higher commission income

Our view – Material sequential margin decline the result of shedding high-risk gold loan customers

The material sequential decline in NIM was on account of gold loan risk management along with rise in cost of funds: There has been a sequential decline of 30 bps in yield on advances to 10.88% mainly due to the gold loan business. Gold loan prices had started dropping which prompted the management to ask the gold loan business team to take customers with higher LTV off the books. The customers with high LTV are also the ones which have higher yield. The gold loan yield has declined from 11.78% in 1Q to 10.99% in 2Q but is poised to move up in 3Q itself.

Management stated that the bank would grow 50% faster than the banking system: The segmental growth outcomes are: Wholesale – 17% YoY, SME –22% YoY, Retail (ex Gold) – 38% YoY and Gold loan - 32% YoY. The share of gold loans in loan book is 47%. The gold loan LTV is 81%.

Assetquality outcomes remain ultra-benign as of now with low-LGD gold loansbeing the primary contributor to slippages: Most of the slippages emerged from the gold loan book and the rest of the contributing segments were in line with what has been seen in the past. Credit cost would range between 10-20 bps for FY24. The credit cost next year (or later) would be 40-50 bps when the bank would become a full franchise.

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