IIB reported its first quarter (Q1FY20) results with merger financials with BHAFIN (Bharat Financial; not rated). PPOP at Rs 26 bn was in line with our expectation as the weaker NII was offset by lower opex/ higher treasury gains. Asset quality was comforting with a reduction of Rs 2 bn in the stressed pool (down to Rs 32 bn – 1.7% of loans) and negligible corporate slippages in a quarter where there has been significant amount of defaults/rating downgrades.
Due to some asset quality cracks in FY19 and weaker liability and bulkier fee profile vs HDFCB/KMB, IIB’s valuations should not be benchmarked to HDFCB (like in the past). But, IIB still remains a very strong retail asset franchise, which is further strengthened by BHAFIN’s merger. Operationally, growth can be a near-term challenge, but with the rate cycle reversing, margin clearly looks to have bottomed out for IIB. With 110/85bps credit costs, flat margins and lower corporate fee intensity, we expect IIB to report a consolidated ROE of 19% by FY21F. Current valuation at 2.25x Jun-21F book is reasonable; hence, we maintain our 'Buy' rating with TP of Rs 1,775, which implies a 2.7x Jun-21F book multiple.
Consolidated PPOP of Rs 25.9 bn was in line with our expectation with a miss on NII (Rs 28.4 bn vs our expectation of Rs 29.6 bn), made up by higher treasury income and lower opex. PAT was higher than expected as corporate slippages and credit costs were materially lower than our expectation, leading to the headline PAT beat.
On a consolidated basis, loan book was flat sequentially. The microfinance book was flat q-o-q as the company tightened its lending norms in states like Orissa where it sees an emerging problem of over-leveraging. The standalone loan book growth was muted q-o-q due to the slower growth in LAP/ cards and large corporate book.