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IndusInd Bank
Overweight
INBK.BO, IIB IN
Profit momentum continues; maintain Overweight
• Strong in-line 3Q FY11: IndusInd Bank reported 3Q FY11 net profit of
Rs1.54B, up 75% y/y, in line with our estimate and higher than
consensus. Profit growth momentum remained robust, with strong
revenue growth, improvement in the cost-to-income ratio, and stable
asset quality and credit costs.
• Strong revenue growth: Revenue growth stayed strong, with robust
loan growth, improving margins, and a very strong fee income trend.
Loan growth was strong at 30% y/y, with +30% loan growth for both the
corporate and CV book. Fee income momentum remains strong, with IB
expected to contribute significantly to growth over the next two years.
• Margins improve further: Margins improved by another 20bp to 3.6%
in 3Q FY11. Although margins were helped by the equity issue in Sep-
10, increasing LDR and higher CASA led to margin improvement. We
believe margins will moderate in the near term due to an increase in
leverage and rising rates, but a steady CASA improvement should lead
to increasing margins with management targeting 4.0% over the next
two years.
• Stable asset quality: Gross NPA ratios remained stable at 1.2%, flat
q/q, and credit costs were down to ~90bp from ~97bp in 2Q FY11.Some
risks exist for the MFI book, but the telecom book is restricted to tower
funding with no exposure to 2G/3G licenses.
• Maintain Overweight: Overall the result was positive, with strong
growth in profitability and stable margins and asset quality. We believe
current valuations at 2.4x FY12E book and 13.5x FY12E EPS look
attractive given the high expected growth (~44% profit growth in FY11-
13E) and high return ratios (>1.6% ROA in FY11-13E). We maintain our
earnings estimates and PT. A key risk is the cyclical nature of the CV
business, which can have an impact on credit growth.
Margins improve further
Margins for IndusInd improved by ~20bp in the quarter, primarily due to the equity
issue, higher LDR, and improvement in CASA ratios. Management expects to
maintain or improve margins going forward. Although the impact of thr equity issue
would be leveraged off and limited upside is expected from LDRs, the improvement
in CASA ratios is expected to aid further margin improvement.
Strong overall loan growth
Overall loan book growth was strong at ~30% y/y with strong growth both from the
retail book and corporate loan book. The CV loan book was up 36% y/y with very
strong disbursements. Management did indicate that it would now also concentrate
on old vehicle financing. Corporate loan book growth was ~30% y/y. Management
expects the growth momentum to continue, with a similar loan mix to be sustained.
Cost-to-income ratio to show gradual improvement
Cost to income has been improving over the past two quarters, and management
expects the gradual improvement to continue. Management maintains its target of a
45% cost-to-income ratio by FY13, with the current ratio at ~48%, implying a 300bp
improvement over the next nine quarters
Fee income growth remains robust
Fee income growth was also strong, with a ~54% y/y increase in core fees. Trade and
remittances are riding on corporate lending, new client-based platforms and products
are aiding forex income, and third-party income is still seeing growth. Also,
investment banking has started contributing in a significant manner with
management expecting ~Rs2.5B of revenues from IB over the next 2-3 years.
Asset quality remains stable
Gross NPAs remained stable at 1.2%, flat q/q, and credit costs dipped marginally to
90bp in 3Q FY11. Currently management is not seeing any stress in the MFI
exposure (Rs2.6B - 1% of advances). Although over the long term management is
sanguine about the prospects of the MFI sector, there could be some near-term
pressure, especially in the Andhra book. IndusInd has just 1.2% exposure to the
telecom sector, with no exposure to 2G/3G license funding
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