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IndusInd Bank (IIB)
Banks/Financial Institutions
Potent mix deserving of premium; BUY. We like IndusInd Bank’s business model,
with its complementary mix of high-yielding retail assets and fast-growing corporate
book. The new management is focusing on profitability, consistency and balanced
growth. We expect the bank to deliver over 24% growth in earnings with RoAs at
1.4% and RoEs at about 20%. It trades at 2.6X FY2012E book and 16X EPS. We initiate
coverage with a BUY rating and target price of `300 (3.2X FY2012 book).
IIB brings in the best in a balance sheet—retail assets and improving retail liabilities
We like IIB’s business model which combines high-yielding retail assets (vehicle finance) and higher
fee income with an improving liability profile. Risk adjusted revenues/assets are at about 4.5%
levels, one of the best in the industry and only marginally lower than HDFC Bank. The bank,
through the acquisition of Ashok Leyland finance in FY2005, has built expertise in its vehicle
finance portfolio resulting in high risk-adjusted returns. The new management is focusing on
improving its liability profile and diversifying revenue streams.
New management’s edge is execution
The bank’s new management, which came in as a team in FY2008, has effected a remarkably fast
transformation: margins expanded 200 bps, RoAs improved 120 bps to 1.5% and RoEs more than
doubled to 20%. The quick turnaround was aided by key business heads assuming roles they had
played in earlier assignments. They realigned the loan book to the strengths of its liability profile,
brought in a new workforce, focused on fee income business apart from strengthening
operations. Branch expansion has begun, having been stagnant for about eight quarters.
Earnings growth of at 24% CAGR; attractive ratios of about 20% RoE and 1.4% RoAs
We expect 24% CAGR in earnings for FY2011-13E driven by above-average loan growth of 30%.
IIB is well capitalized with recent dilution with Tier I ratio of 12%; While we assume some
moderation to NIMs, fee income traction is likely to remain strong with new income streams such
as investment banking and wealth management adding up to the fees. IIB is well poised to deliver
RoAs at 1.4% and RoEs of about 20% in the medium term.
Balance sheet management is the key risk
With 40% of the loans being fixed in nature, balance sheet is exposed to interest rate movement
far more than other banks. The ability to improve the liability profile through higher CASA ratio
and mobilize long duration retail deposits is critical to insulate margin volatility. Execution risk
remains as it invests in branches and hires more in this phase of growth. Continuity of top
management remains a key to sustenance of current operating metrics.
VALUATIONS: INITIATE WITH BUY AND TARGET PRICE OF `300
We initiate coverage on IndusInd Bank (IIB) with a BUY rating and target price of `300. At our target, the
bank would trade at 3.1X book and 18X FY2012E EPS, offering an upside of 22% from current levels. We
expect valuations to sustain at higher levels mainly due to superior risk adjusted revenues, healthy earnings
growth of 24% CAGR for FY2011-13E and RoEs closer to 20%. The key risk is the ability of the management
to execute the business in a rising interest rate scenario and improve its liability profile.
Target price of `300 based on 3.2X FY2012 book
Our target price of `300/share implies a valuation multiple of 3.2X FY2012 book and 18X
EPS for a business that is generating RoE of about 20% and 24% earnings growth for
FY2011-13E. Our target price implies 22% upside from current levels. We have used the
residual income model assuming (1) cost of equity at 13.5% and (2) earnings growth
declining gradually to a terminal growth rate of 6%. After the recent correction in stock
price, the bank is trading at fairly attractive levels. We believe higher valuations for the bank
would depend on (1) resilience shown by the business model in a rising interest rate scenario,
(2) maintaining profitability at current levels without unduly shifting business mix towards
riskier products such as unsecured loans, (3) delivering above-industry growth in the medium
term and (4) execution of the management’s objective of improvement in its liability profile.
Expect premium valuation to sustain relative to historical multiples and peers
Compared to the historical average of 1.6X PBR (one year forward), IndusInd Bank is
currently trading at 2.6X FY2012 PBR. The bank is also trading at a premium of about 30%
to most mid-tier private banks. However, we believe that this premium is likely to sustain on
the back of its differentiated business model. Very few banks in India have a strong retailfocused
business model. The new management, which took over the bank from February
2008, is driving changes resulting in strong expansion in NIM and consequently in RoA and
RoE.
Risk-adjusted revenues at over 4.5% among highest in the industry
IndusInd Bank generates over 4.5% risk-adjusted revenues/assets (revenues less loan loss
provisions), next only to HDFC Bank. Axis Bank is marginally higher than IndusInd Bank
despite a low-margin corporate portfolio mainly due to lower credit costs and better liability
profile. The high revenue profile in IIB is due to (1) the high-yielding retail asset portfolio
(current yield is about 16%) which helps the bank generate higher income while (2) the
differentiated origination/servicing strategy and experience in this sector for about two
decades in managing this portfolio has lead to comparatively lower losses.
Sustainable RoEs at 19-20% levels; loan growth of 30% CAGR for FY2011-13E
We expect RoEs for the bank at 19-20% levels for FY2011-13E. The environment for loan
growth continues to remain extremely attractive in most of the retail segments where the
bank is focused while the balance sheet is well capitalized post dilution in 1HFY11 (overall
Tier 1 ratio is about 12%). We expect about 24% CAGR in earnings for FY2011-13E on the
back of higher margins and lower provisioning costs. We are building loan growth of 30%
CAGR and NII growth of about 25% as near-term pressure on funds would be cushioned by
recent equity dilution. Higher investment in business is likely to keep cost-income ratios at
current levels. Loan loss provisions would decline to 0.5% levels in FY2012E from 0.8% in
FY2010 in this phase of the credit cycle.
No near-term concerns on asset quality; provision coverage comfortable
The relatively strong economic environment in this phase of the credit cycle, combined with
better underwriting standards, should result in lower slippages and hence, lower
provisioning costs. We are building in slippages of 1.4-1.5% levels in FY2011-13E compared
to 1.7% in FY2009. Restructured loans are below 0.5% and unlikely to create any
significant impact in the future. We expect gross and net NPLs to sustain at 1.3% and 0.4%
in FY2011-13E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IndusInd Bank (IIB)
Banks/Financial Institutions
Potent mix deserving of premium; BUY. We like IndusInd Bank’s business model,
with its complementary mix of high-yielding retail assets and fast-growing corporate
book. The new management is focusing on profitability, consistency and balanced
growth. We expect the bank to deliver over 24% growth in earnings with RoAs at
1.4% and RoEs at about 20%. It trades at 2.6X FY2012E book and 16X EPS. We initiate
coverage with a BUY rating and target price of `300 (3.2X FY2012 book).
IIB brings in the best in a balance sheet—retail assets and improving retail liabilities
We like IIB’s business model which combines high-yielding retail assets (vehicle finance) and higher
fee income with an improving liability profile. Risk adjusted revenues/assets are at about 4.5%
levels, one of the best in the industry and only marginally lower than HDFC Bank. The bank,
through the acquisition of Ashok Leyland finance in FY2005, has built expertise in its vehicle
finance portfolio resulting in high risk-adjusted returns. The new management is focusing on
improving its liability profile and diversifying revenue streams.
New management’s edge is execution
The bank’s new management, which came in as a team in FY2008, has effected a remarkably fast
transformation: margins expanded 200 bps, RoAs improved 120 bps to 1.5% and RoEs more than
doubled to 20%. The quick turnaround was aided by key business heads assuming roles they had
played in earlier assignments. They realigned the loan book to the strengths of its liability profile,
brought in a new workforce, focused on fee income business apart from strengthening
operations. Branch expansion has begun, having been stagnant for about eight quarters.
Earnings growth of at 24% CAGR; attractive ratios of about 20% RoE and 1.4% RoAs
We expect 24% CAGR in earnings for FY2011-13E driven by above-average loan growth of 30%.
IIB is well capitalized with recent dilution with Tier I ratio of 12%; While we assume some
moderation to NIMs, fee income traction is likely to remain strong with new income streams such
as investment banking and wealth management adding up to the fees. IIB is well poised to deliver
RoAs at 1.4% and RoEs of about 20% in the medium term.
Balance sheet management is the key risk
With 40% of the loans being fixed in nature, balance sheet is exposed to interest rate movement
far more than other banks. The ability to improve the liability profile through higher CASA ratio
and mobilize long duration retail deposits is critical to insulate margin volatility. Execution risk
remains as it invests in branches and hires more in this phase of growth. Continuity of top
management remains a key to sustenance of current operating metrics.
VALUATIONS: INITIATE WITH BUY AND TARGET PRICE OF `300
We initiate coverage on IndusInd Bank (IIB) with a BUY rating and target price of `300. At our target, the
bank would trade at 3.1X book and 18X FY2012E EPS, offering an upside of 22% from current levels. We
expect valuations to sustain at higher levels mainly due to superior risk adjusted revenues, healthy earnings
growth of 24% CAGR for FY2011-13E and RoEs closer to 20%. The key risk is the ability of the management
to execute the business in a rising interest rate scenario and improve its liability profile.
Target price of `300 based on 3.2X FY2012 book
Our target price of `300/share implies a valuation multiple of 3.2X FY2012 book and 18X
EPS for a business that is generating RoE of about 20% and 24% earnings growth for
FY2011-13E. Our target price implies 22% upside from current levels. We have used the
residual income model assuming (1) cost of equity at 13.5% and (2) earnings growth
declining gradually to a terminal growth rate of 6%. After the recent correction in stock
price, the bank is trading at fairly attractive levels. We believe higher valuations for the bank
would depend on (1) resilience shown by the business model in a rising interest rate scenario,
(2) maintaining profitability at current levels without unduly shifting business mix towards
riskier products such as unsecured loans, (3) delivering above-industry growth in the medium
term and (4) execution of the management’s objective of improvement in its liability profile.
Expect premium valuation to sustain relative to historical multiples and peers
Compared to the historical average of 1.6X PBR (one year forward), IndusInd Bank is
currently trading at 2.6X FY2012 PBR. The bank is also trading at a premium of about 30%
to most mid-tier private banks. However, we believe that this premium is likely to sustain on
the back of its differentiated business model. Very few banks in India have a strong retailfocused
business model. The new management, which took over the bank from February
2008, is driving changes resulting in strong expansion in NIM and consequently in RoA and
RoE.
Risk-adjusted revenues at over 4.5% among highest in the industry
IndusInd Bank generates over 4.5% risk-adjusted revenues/assets (revenues less loan loss
provisions), next only to HDFC Bank. Axis Bank is marginally higher than IndusInd Bank
despite a low-margin corporate portfolio mainly due to lower credit costs and better liability
profile. The high revenue profile in IIB is due to (1) the high-yielding retail asset portfolio
(current yield is about 16%) which helps the bank generate higher income while (2) the
differentiated origination/servicing strategy and experience in this sector for about two
decades in managing this portfolio has lead to comparatively lower losses.
Sustainable RoEs at 19-20% levels; loan growth of 30% CAGR for FY2011-13E
We expect RoEs for the bank at 19-20% levels for FY2011-13E. The environment for loan
growth continues to remain extremely attractive in most of the retail segments where the
bank is focused while the balance sheet is well capitalized post dilution in 1HFY11 (overall
Tier 1 ratio is about 12%). We expect about 24% CAGR in earnings for FY2011-13E on the
back of higher margins and lower provisioning costs. We are building loan growth of 30%
CAGR and NII growth of about 25% as near-term pressure on funds would be cushioned by
recent equity dilution. Higher investment in business is likely to keep cost-income ratios at
current levels. Loan loss provisions would decline to 0.5% levels in FY2012E from 0.8% in
FY2010 in this phase of the credit cycle.
No near-term concerns on asset quality; provision coverage comfortable
The relatively strong economic environment in this phase of the credit cycle, combined with
better underwriting standards, should result in lower slippages and hence, lower
provisioning costs. We are building in slippages of 1.4-1.5% levels in FY2011-13E compared
to 1.7% in FY2009. Restructured loans are below 0.5% and unlikely to create any
significant impact in the future. We expect gross and net NPLs to sustain at 1.3% and 0.4%
in FY2011-13E.
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