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IndusInd Bank
Target Price (INR) 305 Large scope to improve deposit profile
The corporate segment has been the engine that lifted loan growth of
IIB close to that of peers in the past three years. The older franchise in
retail loans grew slower than peers and stays concentrated in highyield
vehicle loans. We forecast medium‐term growth in IIB’s loans to
stay near the large new banks. The improvement in the liability mix is
likely to sustain, driven by the wider branch network; the proportion
of saving deposits is likely to rise to 13% at end FY13f. NIM expansion,
aided by a rise in CASA ratio, was a key profitability driver during FY08‐
FY10. This offset the shift in loan mix to low‐yielding corporate loans.
We estimate NIM to improve by 77‐bp over FY10‐FY13f and stay higher
than most peers. While fundamentals would continue to improve, we
forecast net profit growth to fall in line with peers. Therefore, further
re‐rating is unlikely. Initiate with Add and Mar12 TP of INR305.
Focus on corporate lending, yet the tilt towards vehicle loans stays
The focus on corporate segment has raised the share of IIB’s corporate loans
over the past three years to 32.3% at end Mar10. The share of retail loans stays
above that for most peers and largely comprises high‐yielding vehicle loans
(72%). The bank’s retail mix is significantly different from that of its peers, with
negligible presence in home loans. After muted loan growth during FY05‐FY08,
IIB bridged the gap with peers with a CAGR of 26.9% during FY08‐FY11f. We
assume loans to grow at a CAGR of 26% during FY11f‐FY13f; the share of retail
loans is likely to remain stable, at c50%.
Improvement visible in the liability franchise, but a long way to go
IIB added 48 branches during FY11f compared to 30 in the preceding eight
quarters. IIB faces the challenge of improving its underutilized existing branch
network as saving deposits per branch, at INR95.7mn (FY10), was way below
those of its peers (INR300bn‐INR400bn). The momentum in savings deposits
during FY08‐FY11f (CAGR of 34%) is likely to continue during FY11f‐FY13f (CAGR
of 55.7%), lifting the proportion of saving deposits to 13% at end FY13f.
Earnings momentum to sustain with stable asset quality in FY12f
NIM expansion, aided by a rise in CASA ratio, was a key profitability driver over
FY08‐FY10. This offset the shift in loan mix to low‐yielding corporate loans. NIM
is likely to improve by 77‐bp over FY10‐FY13f and stay higher than peers.
However, improvement in cost ratios may be limited due to the planned
expansion. Sharp improvement in asset quality during FY08‐FY10 is unlikely to
sustain, as it followed subdued loan growth during FY06‐FY08. Gross NPL ratio
of 1.42% at end Mar13f would be below the past four‐year average of 2.1%.
Initiate with an Add rating and a Mar12 price target of INR305
The P/B discount of IIB to peers has been declining due to the narrowing gap on
parameters such as NIM, NPL ratios and faster growth in net profit. However,
over the next two years, while fundamentals would continue to improve, we
forecast net profit growth to fall in line with peers. Therefore, further re‐rating
is unlikely. Our TP is based on the DCF, P/E and P/B methods. Initiate coverage
with an Add rating and a Mar12 target of INR305.
Investment Summary
The corporate segment has been the engine that lifted loan growth of IIB close to that of peers in the past three years.
The older franchise in retail loans grew slower than peers and stays concentrated in high‐yield vehicle loans. Despite the
decline, the share of retail loans stays above that for most peers and largely comprises high‐yielding vehicle loans. After
muted growth during FY05‐FY08, the bank bridged the gap with peers by growing loans at a CAGR of 26.9% over FY08‐
FY11f. We forecast a CAGR of 55.7% in savings deposits, driven by an increase in branch network and customer
acquisition during FY11‐FY13, lifting the proportion of saving deposits to 13% at end FY13f. NIM expansion, aided by a
rise in CASA ratio, was a key profitability driver during FY08‐FY10. This offset the shift in loan mix to low‐yielding
corporate loans. We estimate NIM to improve by 77‐bp over FY10‐FY13f and stay higher than most peers. Over the next
two years, while fundamentals would continue to improve, we forecast net profit growth to fall in line with peers.
Therefore, further re‐rating and a decline in the discount to peers is unlikely. We initiate coverage with an Add rating
and a Mar12 target of INR305.
Focusing on corporate segment, yet the tilt towards CV lending stays
The focus on corporate segment in the past three years lifted the share of corporate loans of IndusInd
Bank to 32.3% at end Mar10. The share of corporate loans in incremental loans during this period was
54.4%. The subsequent decline in the share of retail loans was mainly driven by commercial vehicle
loans, the share of which declined to 20.7% of total loans. However, the tilt towards vehicle loans
stays, with a 9.7% rise in the proportion of two and three‐wheeler loans. Despite the decline, the share
of retail loans stays above that of most peers, with a dominance in vehicle loans. IIB’s retail mix is
significantly different from those of its peers, with negligible presence in home loans. After muted
growth during FY05‐FY08 (CAGR of 12%), the bank bridged the gap with peers with a CAGR of 26.6% in
total loans between FY08 and FY11f. We assume loan growth to fall in line with those of its peers and
grow at a CAGR of 26% between FY11f and FY13f. We also assume the share of retail loans to remain
stable at c50%, with a CAGR of 26.1%.
Improvement visible in the liability franchise, but a long way to go
During the first three quarters of FY11, IIB added 48 branches, while just 30 branches were added
during the preceding eight quarters. While the initial momentum in network expansion is visible, the
bank faces the challenge of improving its underutilized existing branch network. Saving deposits per
branch were INR95.7mn in FY10 compared to INR300bn‐INR400bn for large peers. We do not think the
gap would be bridged, but it is likely to narrow, driven by the wider branch network and the focus on
customer acquisition. The proportion of savings deposits is way below that of its peers, at 7.2% at end
FY10. However, the proportion is likely to increase on the back of sustained momentum in savings
deposits. Between FY08 and FY11f, IIB’s savings deposits are likely to grow at a four‐year CAGR of 34%,
while the same for peers such as AXSB, ICICIBC and HDFCB is likely to grow slower, at 28.8%, 19.6% and
33.7%, respectively. We assume a CAGR of 55.7% in saving deposits between FY11f and FY13f, lifting
the proportion of saving deposits to 13% at end FY13f.
Margin expansion and low provisions to stay key profitability driver
The strong growth in net interest income, which is driving margin expansion, has been the key
profitability driver during the past two years. The 797‐bp CASA improvement margin improvement and
helped offset the shift in the loan mix to low‐yielding corporate loans. As the share of retail loans is
assumed to stay stable at 50%, we estimate margins to improve by 77‐bp over FY10‐FY13f and stay
higher than that of peers. However, the improvement in cost ratios is unlikely to sustain due to the
planned expansion. The bank’s CEB income grew at a CAGR of 41% during the three years ended FY10,
higher than that for HDFCB and ICICIBC. However, despite the faster growth, IIB’s fee intensity, at less
than 1%, is much below those of its peers. We estimate a CAGR of 27% in CEB over the next two years
and gradual improvement in fee intensity. Since the sharp improvement in asset quality during the past
two years, with a decline in incremental NPL followed the subdued loan growth of 3%‐15% during
FY06‐FY08, it is unlikely to sustain. For FY12f and FY13f, we assume the incremental gross NPL to rise
by up to 0.45%. Despite the rise in the gross NPL ratio to 1.42% at end Mar13f, it stays significantly
below the average of 2.1% during the four years ended FY10.
EPS growth may stay ahead of peers, but the gap is likely to reduce
With loan growth of 26%, improvement in margins and lower loan‐loss provisions, we estimate EPS
growth of 48.1% in FY11f and a CAGR of 29% during FY11f‐FY13f. We forecast net profit growth of 66%
in FY11f and a CAGR of 29% during FY11f – FY13f. While the CAGR in EPS growth may still be higher
than that of most peers, we believe the gap is likely to narrow in the following two years. The robust
growth in EPS during FY10‐FY11f, much ahead of peers, has driven the strong outperformance of IIB
relative to its peers. As the gap in EPS growth with large peers continues to narrow, the trend of a fall
in outperformance is likely to continue. We estimate the RoA to further improve by 10‐bp to 1.54%
over FY11f‐FY13f, with an improvement in margins and lower loan‐loss provisions.
Initiate with an Add rating and a Mar12 price target of INR305
The P/B discount of IIB to peers such as HDFCB to AXSB has been declining due to the narrowing gap on
parameters such as NIM, NPL ratios and faster growth in net profit. Also, the bank’s RoE has stayed
above that for HDFCB and AXSB in FY10. However, over the next two years, while the sharp
improvement in NIM and NPL ratios is likely to sustain, we forecast net profit growth to fall in line with
peers. Therefore, a further re‐rating and decline in discount is unlikely to sustain. Our target price is
based on the DCF, P/E and P/B methods. Our DCF‐based fair value stands at INR276, where we assume
a cost of equity of 14% and semi‐explicit and fade period growth of 26% and 3%, respectively. Our
Mar12 target price of INR305 values IIB at 2.7x the one‐year forward book value. Our target multiples
implies a discount of 6% and 29% to AXSB and HDFCB, respectively, and premium of 18% to ICICIBC.
We initiate coverage with an Add rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IndusInd Bank
Target Price (INR) 305 Large scope to improve deposit profile
The corporate segment has been the engine that lifted loan growth of
IIB close to that of peers in the past three years. The older franchise in
retail loans grew slower than peers and stays concentrated in highyield
vehicle loans. We forecast medium‐term growth in IIB’s loans to
stay near the large new banks. The improvement in the liability mix is
likely to sustain, driven by the wider branch network; the proportion
of saving deposits is likely to rise to 13% at end FY13f. NIM expansion,
aided by a rise in CASA ratio, was a key profitability driver during FY08‐
FY10. This offset the shift in loan mix to low‐yielding corporate loans.
We estimate NIM to improve by 77‐bp over FY10‐FY13f and stay higher
than most peers. While fundamentals would continue to improve, we
forecast net profit growth to fall in line with peers. Therefore, further
re‐rating is unlikely. Initiate with Add and Mar12 TP of INR305.
Focus on corporate lending, yet the tilt towards vehicle loans stays
The focus on corporate segment has raised the share of IIB’s corporate loans
over the past three years to 32.3% at end Mar10. The share of retail loans stays
above that for most peers and largely comprises high‐yielding vehicle loans
(72%). The bank’s retail mix is significantly different from that of its peers, with
negligible presence in home loans. After muted loan growth during FY05‐FY08,
IIB bridged the gap with peers with a CAGR of 26.9% during FY08‐FY11f. We
assume loans to grow at a CAGR of 26% during FY11f‐FY13f; the share of retail
loans is likely to remain stable, at c50%.
Improvement visible in the liability franchise, but a long way to go
IIB added 48 branches during FY11f compared to 30 in the preceding eight
quarters. IIB faces the challenge of improving its underutilized existing branch
network as saving deposits per branch, at INR95.7mn (FY10), was way below
those of its peers (INR300bn‐INR400bn). The momentum in savings deposits
during FY08‐FY11f (CAGR of 34%) is likely to continue during FY11f‐FY13f (CAGR
of 55.7%), lifting the proportion of saving deposits to 13% at end FY13f.
Earnings momentum to sustain with stable asset quality in FY12f
NIM expansion, aided by a rise in CASA ratio, was a key profitability driver over
FY08‐FY10. This offset the shift in loan mix to low‐yielding corporate loans. NIM
is likely to improve by 77‐bp over FY10‐FY13f and stay higher than peers.
However, improvement in cost ratios may be limited due to the planned
expansion. Sharp improvement in asset quality during FY08‐FY10 is unlikely to
sustain, as it followed subdued loan growth during FY06‐FY08. Gross NPL ratio
of 1.42% at end Mar13f would be below the past four‐year average of 2.1%.
Initiate with an Add rating and a Mar12 price target of INR305
The P/B discount of IIB to peers has been declining due to the narrowing gap on
parameters such as NIM, NPL ratios and faster growth in net profit. However,
over the next two years, while fundamentals would continue to improve, we
forecast net profit growth to fall in line with peers. Therefore, further re‐rating
is unlikely. Our TP is based on the DCF, P/E and P/B methods. Initiate coverage
with an Add rating and a Mar12 target of INR305.
Investment Summary
The corporate segment has been the engine that lifted loan growth of IIB close to that of peers in the past three years.
The older franchise in retail loans grew slower than peers and stays concentrated in high‐yield vehicle loans. Despite the
decline, the share of retail loans stays above that for most peers and largely comprises high‐yielding vehicle loans. After
muted growth during FY05‐FY08, the bank bridged the gap with peers by growing loans at a CAGR of 26.9% over FY08‐
FY11f. We forecast a CAGR of 55.7% in savings deposits, driven by an increase in branch network and customer
acquisition during FY11‐FY13, lifting the proportion of saving deposits to 13% at end FY13f. NIM expansion, aided by a
rise in CASA ratio, was a key profitability driver during FY08‐FY10. This offset the shift in loan mix to low‐yielding
corporate loans. We estimate NIM to improve by 77‐bp over FY10‐FY13f and stay higher than most peers. Over the next
two years, while fundamentals would continue to improve, we forecast net profit growth to fall in line with peers.
Therefore, further re‐rating and a decline in the discount to peers is unlikely. We initiate coverage with an Add rating
and a Mar12 target of INR305.
Focusing on corporate segment, yet the tilt towards CV lending stays
The focus on corporate segment in the past three years lifted the share of corporate loans of IndusInd
Bank to 32.3% at end Mar10. The share of corporate loans in incremental loans during this period was
54.4%. The subsequent decline in the share of retail loans was mainly driven by commercial vehicle
loans, the share of which declined to 20.7% of total loans. However, the tilt towards vehicle loans
stays, with a 9.7% rise in the proportion of two and three‐wheeler loans. Despite the decline, the share
of retail loans stays above that of most peers, with a dominance in vehicle loans. IIB’s retail mix is
significantly different from those of its peers, with negligible presence in home loans. After muted
growth during FY05‐FY08 (CAGR of 12%), the bank bridged the gap with peers with a CAGR of 26.6% in
total loans between FY08 and FY11f. We assume loan growth to fall in line with those of its peers and
grow at a CAGR of 26% between FY11f and FY13f. We also assume the share of retail loans to remain
stable at c50%, with a CAGR of 26.1%.
Improvement visible in the liability franchise, but a long way to go
During the first three quarters of FY11, IIB added 48 branches, while just 30 branches were added
during the preceding eight quarters. While the initial momentum in network expansion is visible, the
bank faces the challenge of improving its underutilized existing branch network. Saving deposits per
branch were INR95.7mn in FY10 compared to INR300bn‐INR400bn for large peers. We do not think the
gap would be bridged, but it is likely to narrow, driven by the wider branch network and the focus on
customer acquisition. The proportion of savings deposits is way below that of its peers, at 7.2% at end
FY10. However, the proportion is likely to increase on the back of sustained momentum in savings
deposits. Between FY08 and FY11f, IIB’s savings deposits are likely to grow at a four‐year CAGR of 34%,
while the same for peers such as AXSB, ICICIBC and HDFCB is likely to grow slower, at 28.8%, 19.6% and
33.7%, respectively. We assume a CAGR of 55.7% in saving deposits between FY11f and FY13f, lifting
the proportion of saving deposits to 13% at end FY13f.
Margin expansion and low provisions to stay key profitability driver
The strong growth in net interest income, which is driving margin expansion, has been the key
profitability driver during the past two years. The 797‐bp CASA improvement margin improvement and
helped offset the shift in the loan mix to low‐yielding corporate loans. As the share of retail loans is
assumed to stay stable at 50%, we estimate margins to improve by 77‐bp over FY10‐FY13f and stay
higher than that of peers. However, the improvement in cost ratios is unlikely to sustain due to the
planned expansion. The bank’s CEB income grew at a CAGR of 41% during the three years ended FY10,
higher than that for HDFCB and ICICIBC. However, despite the faster growth, IIB’s fee intensity, at less
than 1%, is much below those of its peers. We estimate a CAGR of 27% in CEB over the next two years
and gradual improvement in fee intensity. Since the sharp improvement in asset quality during the past
two years, with a decline in incremental NPL followed the subdued loan growth of 3%‐15% during
FY06‐FY08, it is unlikely to sustain. For FY12f and FY13f, we assume the incremental gross NPL to rise
by up to 0.45%. Despite the rise in the gross NPL ratio to 1.42% at end Mar13f, it stays significantly
below the average of 2.1% during the four years ended FY10.
EPS growth may stay ahead of peers, but the gap is likely to reduce
With loan growth of 26%, improvement in margins and lower loan‐loss provisions, we estimate EPS
growth of 48.1% in FY11f and a CAGR of 29% during FY11f‐FY13f. We forecast net profit growth of 66%
in FY11f and a CAGR of 29% during FY11f – FY13f. While the CAGR in EPS growth may still be higher
than that of most peers, we believe the gap is likely to narrow in the following two years. The robust
growth in EPS during FY10‐FY11f, much ahead of peers, has driven the strong outperformance of IIB
relative to its peers. As the gap in EPS growth with large peers continues to narrow, the trend of a fall
in outperformance is likely to continue. We estimate the RoA to further improve by 10‐bp to 1.54%
over FY11f‐FY13f, with an improvement in margins and lower loan‐loss provisions.
Initiate with an Add rating and a Mar12 price target of INR305
The P/B discount of IIB to peers such as HDFCB to AXSB has been declining due to the narrowing gap on
parameters such as NIM, NPL ratios and faster growth in net profit. Also, the bank’s RoE has stayed
above that for HDFCB and AXSB in FY10. However, over the next two years, while the sharp
improvement in NIM and NPL ratios is likely to sustain, we forecast net profit growth to fall in line with
peers. Therefore, a further re‐rating and decline in discount is unlikely to sustain. Our target price is
based on the DCF, P/E and P/B methods. Our DCF‐based fair value stands at INR276, where we assume
a cost of equity of 14% and semi‐explicit and fade period growth of 26% and 3%, respectively. Our
Mar12 target price of INR305 values IIB at 2.7x the one‐year forward book value. Our target multiples
implies a discount of 6% and 29% to AXSB and HDFCB, respectively, and premium of 18% to ICICIBC.
We initiate coverage with an Add rating.
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