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Polished execution; Core liabilities driven growth strategies
Niche presence to keep return ratios healthy; Buy with a target price of Rs330
IndusInd Bank's NIM has improved to 3.61% (from 1.84% in 4QFY08), fee income to average
assets has increased to 1.7% (from 1.1% in 4QFY08), C/I ratio has declined to 48% (from
69% in 4QFY08) and RoA has improved to ~1.5% (from 0.3% in 4QFY08). The new management
team, led by Managing Director Mr Romesh Sobti, took charge in February 2008 and has
since been effecting structural and operational changes to improve productivity and
efficiency, leading to strong improvement in core operating performance. Having achieved
RoA of ~1.5%, we believe the management's focus would now be on scalability. We
expect RoA to remain at ~1.5%, led by the bank's core retail liability driven strategy.
Impressive turnaround led by highly incentivized top management: Prior to
the new management taking over, IndusInd Bank (IIB) faced a problem of identity
crisis, and impaired earnings and assets, which led to a significant deterioration in
financial ratios. With the new management taking over, branch network has increased
by ~50% in the last one year and it plans to add 100 branches every year. It has also
introduced operational changes in terms of organization and risk management function,
leading to an impressive improvement in core operations. The management's interests
are well aligned, with an attractive ESOP scheme across cadres. ESOPs constitute
~7% of IIB's total outstanding equity capital.
Above industry growth and superior margins to sustain: Capitalizing on its niche
presence in CV financing and utilizing the new management's relationships for corporate
loan growth, IIB has been able to achieve above industry loan growth. The bank’s loan
growth has increased considerably, recording a CAGR of 29% over FY08-10 as against
the industry average of 17%. Over FY11-13, IIB to continue gaining market share,
aided by its focus on core retail liabilities. We expect CASA ratio to improve from
26.8% in 9MFY11 to 33% in FY13. Increase in high yielding CV loans and low cost
CASA deposits will help IIB to ensure that its NIM remains one of the highest in the
industry at ~3.6%.
Sharp increase in fee income contribution: Under-utilized branch network,
technological backwardness, and lack of new product rollouts and branch accountability
resulted in fee income CAGR of just 12% over FY05-08. To grow fee income, the new
management put in place a dedicated team and introduced newer products. Fee
income growth in FY11 is likely to be ~50% and we have built in 33% CAGR over
FY11-13.
Impressive execution, superior return ratios: Strong improvement in core operating
performance and faster than expected turnaround of operations demonstrate the
management's execution skills. Superior margins, focused fee income strategy and
control over C/I ratio will keep core operating profitability strong. Improving liability
franchise, structural improvement in RoA and 30% asset growth should help IIB to
post one of the highest PAT CAGR (~30%) among the banks under our coverage. We
expect RoA to remain strong at ~1.5% over FY11-13. Buy with a target price of Rs330
(3x FY13E BV of Rs110).
3QFY11 highlights
Key positives
Loans grew 31% YoY and 7% QoQ to Rs250b. Loan
growth was led by traction in the vehicle financing
segment (CVs up 5% QoQ, UVs up 11% QoQ, car
loans up 16% QoQ).
CASA deposits outpaced overall deposit growth; as
a result CASA ratio improved 135bp QoQ to 26.8%.
CASA deposits grew 47% YoY to ~Rs82.1b.
Core fee income grew ~54% YoY to ~Rs1.7b led by
forex (up 96% YoY) and investment banking related
fees of Rs283m (v/s ~Rs2m in 3QFY10).
Reported NIMs improved 20bp QoQ and 67bp YoY
to 3.61%, led by a higher CD ratio.
Key negatives
CD ratio increased to 82% v/s the RBI comfort level
of 75%. The bank used the money raised through
equity (~Rs11b raised in September 2010) and
tapped alternative funding sources (repo and
NABARD, low cost funds) to retire high cost deposits,
thereby improving margins.
Other highlights
Operating expenses grew 49% YoY led by increase
in branch network to 258 from 200 in 3QFY10 and
238 in 2QFY11. C/I ratio remained stable at ~48%
QoQ on the back of strong core operating income
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Polished execution; Core liabilities driven growth strategies
Niche presence to keep return ratios healthy; Buy with a target price of Rs330
IndusInd Bank's NIM has improved to 3.61% (from 1.84% in 4QFY08), fee income to average
assets has increased to 1.7% (from 1.1% in 4QFY08), C/I ratio has declined to 48% (from
69% in 4QFY08) and RoA has improved to ~1.5% (from 0.3% in 4QFY08). The new management
team, led by Managing Director Mr Romesh Sobti, took charge in February 2008 and has
since been effecting structural and operational changes to improve productivity and
efficiency, leading to strong improvement in core operating performance. Having achieved
RoA of ~1.5%, we believe the management's focus would now be on scalability. We
expect RoA to remain at ~1.5%, led by the bank's core retail liability driven strategy.
Impressive turnaround led by highly incentivized top management: Prior to
the new management taking over, IndusInd Bank (IIB) faced a problem of identity
crisis, and impaired earnings and assets, which led to a significant deterioration in
financial ratios. With the new management taking over, branch network has increased
by ~50% in the last one year and it plans to add 100 branches every year. It has also
introduced operational changes in terms of organization and risk management function,
leading to an impressive improvement in core operations. The management's interests
are well aligned, with an attractive ESOP scheme across cadres. ESOPs constitute
~7% of IIB's total outstanding equity capital.
Above industry growth and superior margins to sustain: Capitalizing on its niche
presence in CV financing and utilizing the new management's relationships for corporate
loan growth, IIB has been able to achieve above industry loan growth. The bank’s loan
growth has increased considerably, recording a CAGR of 29% over FY08-10 as against
the industry average of 17%. Over FY11-13, IIB to continue gaining market share,
aided by its focus on core retail liabilities. We expect CASA ratio to improve from
26.8% in 9MFY11 to 33% in FY13. Increase in high yielding CV loans and low cost
CASA deposits will help IIB to ensure that its NIM remains one of the highest in the
industry at ~3.6%.
Sharp increase in fee income contribution: Under-utilized branch network,
technological backwardness, and lack of new product rollouts and branch accountability
resulted in fee income CAGR of just 12% over FY05-08. To grow fee income, the new
management put in place a dedicated team and introduced newer products. Fee
income growth in FY11 is likely to be ~50% and we have built in 33% CAGR over
FY11-13.
Impressive execution, superior return ratios: Strong improvement in core operating
performance and faster than expected turnaround of operations demonstrate the
management's execution skills. Superior margins, focused fee income strategy and
control over C/I ratio will keep core operating profitability strong. Improving liability
franchise, structural improvement in RoA and 30% asset growth should help IIB to
post one of the highest PAT CAGR (~30%) among the banks under our coverage. We
expect RoA to remain strong at ~1.5% over FY11-13. Buy with a target price of Rs330
(3x FY13E BV of Rs110).
3QFY11 highlights
Key positives
Loans grew 31% YoY and 7% QoQ to Rs250b. Loan
growth was led by traction in the vehicle financing
segment (CVs up 5% QoQ, UVs up 11% QoQ, car
loans up 16% QoQ).
CASA deposits outpaced overall deposit growth; as
a result CASA ratio improved 135bp QoQ to 26.8%.
CASA deposits grew 47% YoY to ~Rs82.1b.
Core fee income grew ~54% YoY to ~Rs1.7b led by
forex (up 96% YoY) and investment banking related
fees of Rs283m (v/s ~Rs2m in 3QFY10).
Reported NIMs improved 20bp QoQ and 67bp YoY
to 3.61%, led by a higher CD ratio.
Key negatives
CD ratio increased to 82% v/s the RBI comfort level
of 75%. The bank used the money raised through
equity (~Rs11b raised in September 2010) and
tapped alternative funding sources (repo and
NABARD, low cost funds) to retire high cost deposits,
thereby improving margins.
Other highlights
Operating expenses grew 49% YoY led by increase
in branch network to 258 from 200 in 3QFY10 and
238 in 2QFY11. C/I ratio remained stable at ~48%
QoQ on the back of strong core operating income
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