Valuations are nonetheless at discount to previous typical and improvement in development/high-quality outlook can drive rerating.
We hosted SV Parthasarthy (Head, Consumer Finance) & Sanjay Mallik (Head Strategy & IR) for investor calls exactly where they highlighted that the bank’s restructured book may possibly be close to low-single-digit % of loans. Provisioning may possibly be elevated in H2FY21 as the bank covers for downgrades & some buffer-provisions. Lower concentration, on assets & liabilities, are essential medium-term targets. Warrants are due for conversion in January-21 at Rs 1,709/ sh that can add 5% to capital.
Collections holding up, but provisioning will normalise immediately after H2FY21: IIB’s loan collection levels have continued to be healthier (95-96%) and mgmt continues to guide for low single-digit restructuring on general loans. It believes legacy corporate stressed exposures (pre-Covid) have largely been dealt with and incremental exposures are of superior high-quality. Unsecured exposures in retail (MFI and credit cards) which are below pressure will be dealt with upfront via downgrade/ provisioning, and restructuring in retail largely relates to pockets which have been severely impacted (passenger buses, hospitality, and so on). Mgmt expects credit expenses to stay elevated via H2FY21 as it will continue to present for pressure preemptively, whilst this need to normalise towards FY22.
Effort to granularise each sides of balance sheet: Mgmt continues to operate towards granularising each IIB’s deposit and asset franchises. On the corporate loan front, it has been engaged on decreasing chunky exposures – this will have an influence on costs. Simultaneously, mgmt is functioning towards escalating the share of retail deposits (33% of deposits at present).
IIB is nonetheless providing pre-Covid levels of interest prices on retail term deposits even as bigger peers have reduce them by 80-130bps. Initiatives on retail deposit side and unwind of corporate deposits will support bring down concentration and expenses.
IWG report permits promoters to raise stake warrant conversion will address doubts: The IWG report recommends a uniform cap of 26% for bank promoters – IIB promoters hold 13.5% stake in the bank (14.7% ex-GDR in base). Promoters also hold 15.8 mn warrants (2% of current shares), which will lapse in Jan-21. These warrants convert at Rs1,709/sh and 25% has currently been paid upfront in Jul-19. If promoters convert these warrants into shares, it will not only lift net worth by Rs 20 bn or 5%, but will also address doubts.
Raise earnings estimates and TP: We raise our earnings forecasts for FY22-23 by 3-5% factoring in decrease credit expenses and greater topline. Valuations are nonetheless at discount to previous typical and improvement in development/high-quality outlook can drive rerating. We also raise our TP to Rs 1,030 primarily based on 1.8x Sep-22 adjusted PB (from Rs 800 earlier that was primarily based on 1.4x adjusted PB). Buy stays.