IndusInd Bank (IIB IN, Mkt Cap US$2.8b, CMP Rs275, Not Rated) reported 71% YoY growth in 2QFY11 net profit to Rs1.3b (up 12% QoQ). Strong growth in profits was driven by:
(1) 58% growth in NII to Rs3.3b as loans grew 33% YoY and margin expanded 55bp YoY (9bp QoQ),
(2) Strong core fee income growth of 34% YoY due to traction in trade and investment banking related fees, and
(3) Fall in cost to income ratio to 48% vs 54% a year ago.
Stellar performance on margins continues
- NII grew ~58% YoY and ~12% QoQ to ~Rs3.3b, led by sequential expansion in margins and continued traction in loan growth.
- Reported NIMs improved 9bp QoQ and 55bp YoY to 3.41%. While yield on loans declined 8bp QoQ to 12.1%, improvement in yield on investments by 26bp QoQ to 6.16% and stable cost of deposits at 5.99% led to sequential improvement in NIMs.
- Management expects incremental yield on loans to be higher going forward as it has raised its PLR by 75bp and base rate by 50bp during 2QFY11; full effect of this will reflect in 3QFY11.
- Higher yields, strong growth in low cost deposits, and deployment of equity money (Rs12b raised in Sept-10) would keep NIMs healthy in near term.
Margin improvement continues (%)
Business growth remains strong
- Loan book grew 33% YoY and 9% QoQ to Rs235b. Growth in loans was led by traction in vehicle financing segment (CVs – up 11% QoQ, UVs – 8% QoQ, car loans – 13% QoQ). Overall, the consumer finance segment witnessed a growth of 9% QoQ (and 29% YoY). The share of vehicle finance in overall loans improved 40bp QoQ to 41.2%. Corporate and commercial banking segment grew by 8% QoQ (37% YoY).
- Deposits grew at a robust pace of 14% QoQ and 37% YoY to Rs313b. CASA deposits grew 19% QoQ (64% YoY) to ~Rs79.5b outpacing overall deposit growth. Current account deposits grew 21% QoQ and savings deposits by 16% QoQ. Consequently, CASA ratio expanded 110bp QoQ and 420bp YoY to 25.4%. (CASA deposits included Rs1.5b of float money on account of various equity issuances in primary market.)
- Branch additions and thrust on increasing CASA base would lead to gradual improvement in CASA deposits.
Strong traction in loan growth
Strong fee income growth; stable C/I ratio
- IndusInd’s core fee income exhibited a growth of ~34% YoY to ~Rs1.6b led by trade and remittance related fees (up 57% YoY) and fee from investment banking Rs190m (v/s Rs70m in 2QFY10). Income from third party distribution also reported growth of 21% YoY to Rs400m (on a higher base). The bank booked lower treasury gains of Rs130m in 2QFY11 as against Rs160m in 2QFY10 (Rs286m in 1QFY11).
- Operating expenses were at ~Rs2.43b (up 31% YoY). Employee cost was up 21% YoY whereas other operating expenses increased 38% YoY. C/I ratio declined marginally to 48.1% from 49.5% in 1QFY11. Higher other operating cost is largely attributed to increase in branch network to 238 from 180 in 2QFY10 and 224 in 1QFY11.
- The management plans create a network of 300 branches by end FY11, 450 branches by FY12 and 600 by FY13.
Fee income traction remains strong
Asset quality stable QoQ
- Gross slippages in 2QFY11 was at Rs750m (1.46% of loans - annualized). Additions were largely from consumer finance division.
- However with strong upgradations of Rs640m during the quarter, Gross NPAs remained stable at 1.21%. NNPA declined by 35bp YoY (stable QoQ) largely due to higher provisions made during the year.
- Quarterly credit cost stood at 14bp vs 22bp in 1QFY11. Management expects for the year credit cost to be in the range of 60-70bp.
- Restructured loans remain one of the lowest in the industry at 18bp of the outstanding loan book.
Trend in NPAs (%)
Valuations and view
- Having depicted their execution capabilities in terms of improvement in NIMs, increasing CASA mix, strengthening asset quality and higher return ratios, focus going ahead would be on increasing franchise network, maintaining 25-30% growth rates and operating parameters
- Rapid branch network expansion, acquisition of new customers and deepening of existing customer relationships would help ensure that its asset growth remains higher than industry and would also strengthen liability profile.
- Bank has recently raised Rs12b through QIP (at a price of Rs234 per share) leading to increase in CAR to 16.2% (Tier I 12.2%). Thus, we believe capital would not be a constraint for achieving higher growth.
- We estimate 42% CAGR in PAT over FY10-12E and RoAs to improve to 1.4%+. On account of recent equity raising, RoEs would be subdued at ~ 18% for FY12E.
- The stock trades at 3.3x FY11E BV and 2.9x FY12E BV. Not Rated.
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