IDFC research: IndusInd Bank: Highlights of Q2FY11 results- outperformer

IndusInd Bank: Highlights of Q2FY11 results
IndusInd Bank reported strong set of results with a PAT of Rs1.33bn - 71% yoy and 12% qoq growth in Q2FY11 vs. our
estimate of Rs1.38bn. The earnings growth was led by strong NII growth, traction in fee income, robust loan growth and
continued expansion in CASA ratio.
• Strong NII growth: NII came in at ~Rs3.3bn, a strong 58% yoy and 12% qoq growth – ahead of our estimate of
Rs3.1bn. The traction was led by sequential increase in margins and robust loan growth.
• Margins expand sequentially: Reported NIMs improved by 9bp qoq to 3.41% buoyed by stable costs of deposits and
rise in yield on investments. Costs of deposits remained steady at 5.99%, as re-pricing of term deposits at higher rates
was balanced by rising proportion of CASA deposits. Yield on investments increased by 26bp qoq to 6.16% from
5.90% in Q1FY11. (Exhibit 1)
• Strong CASA growth: CASA deposits grew by a strong 65% yoy to ~Rs80bn aided by a robust 21% qoq and 73% yoy
growth in current deposits (aided by strong IPO flow in Q2FY11). Savings deposits grew by 48% yoy and 15% qoq to
Rs23.6bn. Consequently, CASA ratio expanded by 114bp qoq to rise to 25.4% compared to 24.3% in Q1FY11 and 21.2%
in Q2FY10. (Exhibit 2)
• Robust loan growth: Total advances grew by a strong 9% qoq and 33% yoy to Rs234bn. Growth in advances was
broad based as both consumer finance and corporate loans grew by robust 9.1% and 8.2% qoq growth respectively.
Within consumer finance auto loans (CV – up 11% qoq, 3W – up 11% qoq and UVs – up 8% qoq) continued to gain
traction. On the liability side, deposits grew faster at 37% yoy, leading to decline in CD ratio to 75% from 79% in
Q1FY11. (Exhibit 4)
• Healthy core-fee income growth: IndusInd’s core fee income exhibited a growth of ~32% yoy to ~Rs1.6bn led by
traction in transaction banking fees (57% yoy) and investment banking fees ( up 2.7x yoy to Rs190m). Forex income atRs300m grew by 50% yoy in Q2FY11. The bank booked treasury profit of Rs120m in the quarter. Overall total other
income increased by 9% qoq and 32% yoy to Rs1.75bn. (Exhibit 3)
• Coverage ratio remained stable: Provision expenses came in ahead of expectation at Rs567m – 16% qoq and 46% yoy
increase. However, provisions on NPA declined by 27% qoq to Rs335m from Rs457m in Q1FY11. The bank booked
Rs80mn of depreciation on investments. Due to higher provisions, coverage ratio increased to 70.8% from 70% in
Q1FY11. (Exhibit 5)
• Asset quality improves: Gross NPAs declined to 1.21% in Q2FY11 (increase of Rs112mn in absolute terms) compared
to 1.26% in Q1FY11 and 1.50% in Q2FY10. Gross slippages for Q2FY11 stood comfortable at Rs750m (1.4% of
advances- annualized). Owing to higher provisions, net NPAs declined to 0.36% in Q2FY11 from 0.38% in Q1FY11.
• Boost in capital ratio: IndusInd’s Tier I ratio increased to 12.2% in Q2FY11 from 8.7% in Q1FY11, boosted by the
$253mn QIP issuance in September 2010. Subsequently CAR increased to 16.2% (as per Basel II norms) from 13.7% in
Q1FY11.
Valuations & View
IndusInd bank has again delivered a strong performance led by traction in net interest income. The bank has
consistently delivered across all metrics - evident from higher margins, expanding CASA base, robust credit growth,
strong fee income and healthy asset quality. Having successfully executed a marked improvement in operating
performance, the management is now working to accelerate loan growth (~35% CAGR over FY10-13E) and grow
profitably. Driven by a sound business model and significantly underutilized franchise, we expect IndusInd to
deliver impressive 43% earnings CAGR over FY10-13. Despite the recent run-up in the stock price, (99%
outperformance vis-à-vis the Sensex over past 12 months), we expect further upside driven primarily by RoA
expansion (~35bp over FY10-13) and strong asset growth. At 2.9x FY12E adjusted book we reiterate Outperformer.
IndusInd Bank continues to be amongst our top midcap picks in the financials space.