Sequentially, the bank’s advances grew 2%, while deposits fell by 5% in the recently concluded quarter.
The CASA ratio improved from 8.7% in Q4FY2009 to 9.5% due to the 3% sequential growth in CASA deposits even as Term Deposits (TDs) declined.
Moreover, downward re-pricing of Wholesale Deposits during the quarter proved to be especially beneficial for the largely wholesale-funded bank, with cost of funds coming down sequentially by a substantial 70bp to 8.1% (down 150bp from a peak of 9.6% in Q3FY2009).
This drove a further 10bp sequential improvement in reported NIMs for the quarter to 3.1%, enabling the Bank to post a healthy 45% y-o-y growth in Net Interest Income (NII).
Core Fee Income remained subdued although substantial treasury gains of Rs45 crore during the quarter helped push up Other Income (OI) to 55% on y-o-y basis.
Income from the Financial Advisory Segment (comprising Investment Banking, Debt syndication, etc.) though still 25% lower on a y-o-y basis, increased 24% q-o-q.
Outlook and valuation
At Rs156, the stock is trading at 11.2x FY2011E EPS of Rs13.9 and 2.0x FY2011E Adjusted Book Value of Rs78.7.
We believe flush liquidity in the system following continued RBI measures should continue to improve the operating environment for the Bank.
The management has also guided for potential increase in growth rates from 2HFY2010E onwards.
While the headwinds being faced by the Bank have set back its retail expansion plans possibly by up to a year, we believe current valuations are reasonable, keeping in mind the Bank’s growth potential in the medium term.
We maintain a BUY on the stock, with a target price of Rs181, implying an upside of 16%.