Key Rating Drivers & Detailed Description
Strengths:
Capitalisation is healthy for the bank, as reflected in Tier 1 capital adequacy ratio (CAR) of 13.67% and overall CAR of 15.35% as on September 30,2022 (14.88% and 16.74%, respectively, as on March 31, 2022). Capitalisation has been supported by timely capital raises of Rs 2,000 crore and Rs 3,000 crore in the first quarters of fiscals 2021 and 2022, respectively, along with the Rs 1,500 crore Tier II bonds raised in the fourth quarter of fiscal 2022. The ability to demonstrate sustained improvement in profitability would further support the capitalisation buffers. Consolidated networth was sizeable at Rs 22,153 crore, thereby providing cushion against asset-side risks, with networth coverage for net non-performing assets of 15 times as on September 30, 2022 (Rs 21,082 crore and 11.7 times, respectively, as on March 31, 2022).
With incremental growth focus on the retail and commercial loans portfolio along with scaling down of the legacy infrastructure loan portfolio, capital consumption is expected to be lower than in the past. The management has also demonstrated the ability to raise capital on multiple occasions in the past.
Capitalisation should remain healthy and will support credit growth over the medium term.
- Strengthened liability franchise:
The bank has been focusing on building a granular retail deposit franchise. Of the total deposits, CASA deposits and term deposits up to Rs 5 crore were 84% as on September 30, 2022. Mobilisation of CASA deposits has been steady, accounting for 51.3% of total deposits (35% of overall resources) as on September 30, 2022 (48.4% and 32.3%, respectively, as on March 31, 2022). On an absolute basis, CASA deposits grew at an annualised growth rate of 47% to Rs 63,305 crore as on September 30, 2022, from Rs 51,170 crore as on March 31, 2022.
As the overall loan book did not grow as much as the retail liability franchise, the resources raised have been partly used to run down wholesale deposits and certificate of deposits, which helped to increase granularity of the deposits profile and lower concentration risk by reducing dependence on wholesale deposits. The bank is also expected to retire ~Rs 20,449 crore of high-cost bonds over the next few fiscals.
The ability to continue to scale up the retail liabilities franchise to support credit growth given the re-alignment of interest rates will be a monitorable over the medium term.
- Increased retailisation of asset book supporting asset quality improvement post-pandemic:
Total funded assets grew by 10% to Rs 1,45,362 crore as on September 30, 2022, from Rs 1,31,951 crore as on March 31, 2022 (Rs 1,17,127 crore as on March 31, 2021). In line with its stated strategy, the bank has significantly scaled up the proportion of granular retail and commercial book to 75% of the overall funded assets as on September 30, 2022, from 72% as on March 31, 2022 (36% as on March 31, 2019). The retail and commercial portfolio grew by 18.6% to Rs 1,09,669 crore as on September 30, 2022, from Rs 92,477 crore as on March 31, 2022 (Rs 75,404 crore a year earlier). Growth has been witnessed across retail product offerings.
The management plans to record steady growth in the retail and commercial loan book in the coming quarters by leveraging their expertise and track record and targeting small entrepreneurs and retail customers to drive growth. The bank had more than 100 lakh retail customers as of September 2022.
The wholesale funded assets stood at Rs 30,875 crore as on September 30, 2022 (Rs 53,614 crore as on March 31, 2019). Within the wholesale funded assets, the bank is gradually scaling down its legacy infrastructure financing portfolio while the non-infrastructure corporate loans portfolio is set to grow on a selective basis. The legacy infrastructure portfolio, with identified potential risk, has run down substantially to Rs 5,992 crore as on September 30, 2022, from Rs 6,891 crore as on March 31, 2022 (Rs 21,459 crore as on March 31, 2019).
Consequently, the concentration risk in total funded assets has reduced, with the top 10 borrowers accounting for only 3.3% (of total funded assets) as on September 30, 2022. The bank plans to further run down the infrastructure financing portfolio over the medium term.
As the infrastructure financing portfolio, which was a major contributor to the GNPAs of the bank in the past, has already reduced sharply; and retail loans have been growing at a steady pace, this structural change in portfolio composition is likely to support an improvement in the overall asset quality. The overall gross non-performing assets (GNPA) reduced to 3.18% (Rs 4,396 crore) as on September 30, 2022, from 3.70% (Rs 4,469 crore) as on March 31, 2022, and 4.15% (Rs 4,303 crore) as on March 31, 2021. This was supported by lower overall slippages and improved asset quality in the retail and commercial portfolio, which comprised 75% of total funded assets as on September 30, 2022 (72% as on March 31, 2022). GNPAs in retail and commercial portfolio reduced to 2.03% (Rs 2,230 crore) as on September 30, 2022, from 2.63% (Rs 2,432 crore) as on March 31, 2022 (4.01%; Rs 2,966 crore).At the same time, the GNPAs of the corporate (non-infrastructure) book, which comprised 17% of total funded assets as on September 30, 2022, stood at 3.43% (Rs 783 crore) as on September 30, 2022, against 2.75% (Rs 599 crore) as on March 31, 2022. The legacy corporate book (around 4% of portfolio) that faced asset quality challenges in the past continues to run down.
The improvement seen in asset quality in the retail and commercial loan book is also manifested in continued high collection efficiency levels (~99.5%) and the improving trajectory of SMA 1 and SMA 2 levels of 1% as on September 30, 2022, from 1.8% as on March 31, 2022 should support asset quality over the medium term.
The bank continues to take various risk management initiatives including reducing borrower concentration, industry concentration, exposure to high-risk sectors, which should support the overall asset quality over medium term.
Weakness:
- Modest, albeit improving, profitability:
Net earnings have been low in the past few fiscals given the early stage of buildup of the bank. In order to enhance CASA deposits and retailisation of the loan book, the bank has, since December 2018, rolled out 464 new branches and 700 new ATMs, hired ~15,000 employees, and invested in digitisation initiatives. As a result, operating cost is on the higher side at 5.7% for the first-half of fiscal 2023. However, it is expected to reduce over the medium term with the planned scale-up in funded assets.
The earnings were also impacted by elevated credit cost as the bank made higher provisioning and write-offs to manage the impact of the pandemic as well as the stress in legacy infrastructure finance portfolio during fiscal 2019 to fiscal 2022. However, credit costs have now reduced to 0.7% (annualised) during the first-half of fiscal 2023 from 1.8% in fiscal 2022. Provision coverage ratio was also adequate at 66% as on September 30, 2022 (70.3% as on March 31, 2022), which supports credit risk profile from potential credit losses. Including technical writeoffs, provision coverage ratio was 76.5% (70.3%).
Overall profitability has started showing signs of improvement with net profit and RoA of Rs 1,052 crore and 1.0%, for the first-half of fiscal 2023, against Rs 132 crore and 0.1%, respectively, for fiscal 2022 (Rs 483 crore and 0.3%, respectively, for fiscal 2021).
While overall earnings were impacted in the past, scaling up of retail and commercial loan portfolio has supported the core profitability, with the bank reporting a pre-provisioning operating profit of Rs 2,142 crore (2.2% of average total assets) for the first-half of fiscal 2023, against Rs 3,284 crore (1.9% of average total assets) for fiscal 2022 and Rs 2,542 crore (1.6%) for fiscal 2021. The net interest margin is also at a comfortable 5.93% for the first-half of the current fiscal given the asset-side focus, and is expected to remain high as the proportion of the relatively higher-yielding retail segment increases and reliance on high-cost wholesale borrowings decreases.
Ability to improve profitability on a sustained basis will remain a key monitorable.