AU SFB earnings missed estimates, with PAT falling to Rs1.2bn, mainly dragged by
provisions of Rs1.38bn toward Covid-19 and higher other opex. Headline GNPAs were
down 20bps qoq to 1.68%, partly due to the moratorium on overdue loans.
Deposit growth was strong at 35% yoy/10% qoq, mainly led by TDs/bulk deposits amid the
Yes Bank saga, while CASA slipped further to 15%. The loan moratorium was availed by
~29% of borrowers/25% in value terms in the non-SMA book. In our view, it will be a
challenge for the bank to manage asset quality, with a higher share of retail/SME and 74%
of AUM from the states, which have a higher number of red zones.
Factoring in lower growth, fees and higher LLP, we cut earnings estimates for FY21/FY22
by 12%/20%, with RoA of 1.7% and RoE of 16%-17%. We also introduce estimates for
FY23 with RoA/RoE of 1.7%/18%.
Maintain Hold/UW in EAP, with a revised TP of Rs535 (2.8x FY22 core ABV), given its rich
valuations. However, the stock’s performance will largely track the bank’s ability to manage
liability and asset quality amid weak macros and Covid-19-induced business disruptions.
Loan growth to moderate; garnering CASA/retail liability more important than ever: The bank
reported some moderation in its AUM growth – up 27% yoy/3% qoq – due to disruptions in the fag end of the quarter in wheels and SME business. Disbursements during Q4 were down 1% qoq, dragging cumulative disbursement growth to 16%. On-balance sheet loan growth was even lower 18% yoy/2% qoq at Rs270bn due to higher securitization as the bank tried to mobilize liquidity post-Yes Bank saga. Deposit growth of 35% yoy/10% qoq was mainly driven by higher retail TDs/bulk CDs, as the CASA share falls to a low of 15%. We believe that garnering CASA for SFBs, in general, will be difficult and thus, the bank will have to accelerate retail TD growth, even at the higher cost. Factoring in the prolonged business disruption and general risk averseness, particularly in wheels and SME business, we have trimmed our AUM growth estimates for FY21/FY22 to 18%/25%.
Managing asset quality could be a challenge in case of prolonged lockdown: The GNPA ratio
improved 20 bps qoq to 1.7% of loans/1.5% of AUM, partially due to the loan moratorium. The bank’s SMA book stood at Rs27bn (now at Rs22bn), on which it made Rs1.38bn provision @5% as required by the RBI. Apart from the 10% SMA book under the moratorium, nearly 25% of non-SMA (22% of overall book) too is under the moratorium. Of the AUM, Rajasthan, Maharashtra, Gujarat and Delhi (with higher number of red zone areas) contribute nearly 74% of AUM. Thus, we believe that the prolonged lockdown or limited activity, coupled with the bank’s otherwise high risk wheels and SME portfolio, could be exposed to higher asset-quality risk. Thus, we build-in higher LLP at 150bps/120bpsin FY21/FY22, adjusted for contingent provisions on the SMA book.
Outlook and valuations: Though the bank reported RoA of 1.8% in FY20, adjusted for one-off gains from Aavas Financiers would have been lower at 1.6%. Factoring in lower growth, fees and higher LLP, we cut earnings estimates for FY21/FY22 by 12%/20% with RoA of 1.7% and RoE of 16%-17%. We also introduce estimates for FY23 with RoA/RoE of 1.7%/18%. We maintain Hold,with a revised TP of Rs535 (valuing the core bank at 2.8x FY22ABV). Key risks to our call are slower loan/deposit growth, higher NPA formation and difficulty in raising capital.
