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IndusInd Bank (IIB)
Banks/Financial Institutions
Maintaining strong growth. IndusInd Bank delivered another strong quarter with net
profits growth of 45% yoy on the back of impressive revenue growth and lower
provisions. Slippages were higher but were largely from corporate loan portfolio while
trends in retail slippages remained healthy. We note that the bank is building a slightly
risky portfolio, especially in retail in the current environment which could result in
higher slippages in FY2013E. We retain our BUY rating (TP `325), valuing it at 3.0X
book and 18X EPS for RoEs of about 18% and over 20% EPS growth for FY2011-13E.
Strong margins performance can support the risk built in loans; maintain BUY
We maintain our BUY rating with TP of `325, giving an upside of about 20% from current levels.
We are valuing the bank at 3X book and 18X FY2013 EPS delivering EPS growth of about 20%
CAGR and RoEs in the range of 18% for FY2011-13E. The bank has outperformed the broader
index highlighting the underlying strength in its retail asset franchise. Aggressive growth in fixed
interest vehicle finance portfolio (current yield of 16%) and decline in cost of funds (current costs
of 8.2%) sets a base for strong NIM expansion (not factored currently to estimates) in FY2013E,
which can offset a rise in provisions if the underlying business environment deteriorates sharply.
Execution of business continues to remain a key strength of the management, especially in the
following areas: (1) Loan growth continues to witness diversification with new loans from LAP,
used-vehicle finance and credit cards. (2) NIM outlook has improved, especially with improving
CASA ratio and higher share of fixed rates loans contracted at current levels. (3) Improved
contribution of fee income to overall non-interest income. (4) Cost-income ratio, despite heavy
investments, is at about 48% levels. Key risks to the call would be: (1) Sharper-than-expected
deterioration in economic environment which would shift focus from growth to strengthening the
quality of balance sheet. (2) Interest rates prevailing at current levels resulting in weak NIM.
Shift in loan composition and better corporate lending yields result in 6 bps qoq NIM decline
NIM declined marginally by about 6 bps qoq to 3.4% levels as cost of funds continued to rise but
was cushioned by shift in loan composition (high yielding retail book) and improvement in
corporate lending yields. Cost of deposits increased by 45 bps qoq to 8.2%. CASA ratio declined
50 bps qoq. Yields on the corporate loan portfolio improved of 60 bps qoq while investment yields
(calc) improved 40 bps qoq. CD ratio declined to 79% from 81% in 1Q.
We are currently building flat NIM for FY2012E but a marginal increase in FY2013E. However, we
believe that IndusInd Bank has the potential to surprise positively over the next few quarters on the
back of (1) decline in cost of deposits from current levels and (2) higher proportion of high yielding
(16% in 2QFY11) fixed retail asset book (46% vehicle finance loans) contracted at current levels.
Loan growth skewed towards retail primarily in high yielding vehicle loans
Loans grew by 29% yoy (6% qoq) to `301 bn—retail loans grew by 50% yoy while the nonretail
portfolio grew 18% yoy. The growth in retail loans is primarily in vehicle loan portfolio
(despite volume weakness at industry level) which grew by 46% yoy (14% qoq) with all
segments growing healthily. Vehicle loan portfolio is now 46% of the overall loans as
compared to 40% in FY2010—used-vehicles are about 10% of this portfolio. Loans in the
corporate loan segment are primarily in the high yielding segment—loans to small business,
which grew 51% yoy.
We broadly maintain our positive outlook on loan growth for the bank at 25% CAGR for
FY2011-13E, given the relatively smaller balance sheet size of the bank, the attractiveness of
the target segments and new initiatives in used vehicle loans, loans against property and
credit cards.
Slippages at 1.8%—primarily from corporate; gross NPLs increase 16% yoy
Gross NPLs increased by 16% yoy (8% qoq) to `3.3 bn (1.1% of loans) from `3.1 bn (1% of
loans) in June 2011 mainly due to higher slippages from the corporate segment. Despite
increasing concern on slippages from the vehicle loan portfolio, the current quarter saw no
such signs despite yields in the retail loans being high at about 16% levels over the past
eight quarters. Net NPLs increased by 11% yoy (11% qoq) to `931 mn. Overall slippages for
the quarter were at 1.8% (1.1% in June 2011) with slippages from the corporate segment
at 1.8% (led by one-off slippage) and slippages from the retail segment at 1.9% (similar to
June 2011). Loan loss provisions (annualized) were at 0.6% for the quarter.
For FY2012-13E, we are building slippages at 1.7% (0.9% in FY2011) and loan-loss
provisions to increase to 1.1% from 0.7% in FY2011. While we build slippages rising from a
cyclical perspective (high interest rates and slowing economy), we believe that IndusInd Bank
has seen a marginal increase in riskiness of the portfolio—new business emerging in higher
delinquent portfolios like credit cards (1% of loans) and used vehicle finance (5% of loans).
Fee income growth impressive at 30% yoy
Non-interest income grew impressively by 36% yoy to `2.4 bn while performance on the
core fee income was equally strong at 30% yoy to `2.1 bn. We note that the improvement
in core fee has been driven by almost all sub-verticals like forex, third party, trade fees and
processing. Income from investment banking was weak qoq. We are building fee income to
grow by 26% CAGR for FY2011-13E.
Other highlights for the quarter
Cost-income ratio at 49% was higher than our estimates mainly due to higher non-staff
expenses. Staff costs grew by 21% yoy while non-staff costs grew by 43% yoy. We
broadly expect this ratio to be maintained at current levels. The bank opened 24 branches
and 33 ATMs for the quarter, taking the total branch network to 350 and ATMs to 666.
Capital adequacy ratio stands at 14.3% with Tier-1 currently at 11.4%. Given the current
headroom and healthy return ratios, we believe that the current capital position is
comfortable for near-term growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IndusInd Bank (IIB)
Banks/Financial Institutions
Maintaining strong growth. IndusInd Bank delivered another strong quarter with net
profits growth of 45% yoy on the back of impressive revenue growth and lower
provisions. Slippages were higher but were largely from corporate loan portfolio while
trends in retail slippages remained healthy. We note that the bank is building a slightly
risky portfolio, especially in retail in the current environment which could result in
higher slippages in FY2013E. We retain our BUY rating (TP `325), valuing it at 3.0X
book and 18X EPS for RoEs of about 18% and over 20% EPS growth for FY2011-13E.
Strong margins performance can support the risk built in loans; maintain BUY
We maintain our BUY rating with TP of `325, giving an upside of about 20% from current levels.
We are valuing the bank at 3X book and 18X FY2013 EPS delivering EPS growth of about 20%
CAGR and RoEs in the range of 18% for FY2011-13E. The bank has outperformed the broader
index highlighting the underlying strength in its retail asset franchise. Aggressive growth in fixed
interest vehicle finance portfolio (current yield of 16%) and decline in cost of funds (current costs
of 8.2%) sets a base for strong NIM expansion (not factored currently to estimates) in FY2013E,
which can offset a rise in provisions if the underlying business environment deteriorates sharply.
Execution of business continues to remain a key strength of the management, especially in the
following areas: (1) Loan growth continues to witness diversification with new loans from LAP,
used-vehicle finance and credit cards. (2) NIM outlook has improved, especially with improving
CASA ratio and higher share of fixed rates loans contracted at current levels. (3) Improved
contribution of fee income to overall non-interest income. (4) Cost-income ratio, despite heavy
investments, is at about 48% levels. Key risks to the call would be: (1) Sharper-than-expected
deterioration in economic environment which would shift focus from growth to strengthening the
quality of balance sheet. (2) Interest rates prevailing at current levels resulting in weak NIM.
Shift in loan composition and better corporate lending yields result in 6 bps qoq NIM decline
NIM declined marginally by about 6 bps qoq to 3.4% levels as cost of funds continued to rise but
was cushioned by shift in loan composition (high yielding retail book) and improvement in
corporate lending yields. Cost of deposits increased by 45 bps qoq to 8.2%. CASA ratio declined
50 bps qoq. Yields on the corporate loan portfolio improved of 60 bps qoq while investment yields
(calc) improved 40 bps qoq. CD ratio declined to 79% from 81% in 1Q.
We are currently building flat NIM for FY2012E but a marginal increase in FY2013E. However, we
believe that IndusInd Bank has the potential to surprise positively over the next few quarters on the
back of (1) decline in cost of deposits from current levels and (2) higher proportion of high yielding
(16% in 2QFY11) fixed retail asset book (46% vehicle finance loans) contracted at current levels.
Loan growth skewed towards retail primarily in high yielding vehicle loans
Loans grew by 29% yoy (6% qoq) to `301 bn—retail loans grew by 50% yoy while the nonretail
portfolio grew 18% yoy. The growth in retail loans is primarily in vehicle loan portfolio
(despite volume weakness at industry level) which grew by 46% yoy (14% qoq) with all
segments growing healthily. Vehicle loan portfolio is now 46% of the overall loans as
compared to 40% in FY2010—used-vehicles are about 10% of this portfolio. Loans in the
corporate loan segment are primarily in the high yielding segment—loans to small business,
which grew 51% yoy.
We broadly maintain our positive outlook on loan growth for the bank at 25% CAGR for
FY2011-13E, given the relatively smaller balance sheet size of the bank, the attractiveness of
the target segments and new initiatives in used vehicle loans, loans against property and
credit cards.
Slippages at 1.8%—primarily from corporate; gross NPLs increase 16% yoy
Gross NPLs increased by 16% yoy (8% qoq) to `3.3 bn (1.1% of loans) from `3.1 bn (1% of
loans) in June 2011 mainly due to higher slippages from the corporate segment. Despite
increasing concern on slippages from the vehicle loan portfolio, the current quarter saw no
such signs despite yields in the retail loans being high at about 16% levels over the past
eight quarters. Net NPLs increased by 11% yoy (11% qoq) to `931 mn. Overall slippages for
the quarter were at 1.8% (1.1% in June 2011) with slippages from the corporate segment
at 1.8% (led by one-off slippage) and slippages from the retail segment at 1.9% (similar to
June 2011). Loan loss provisions (annualized) were at 0.6% for the quarter.
For FY2012-13E, we are building slippages at 1.7% (0.9% in FY2011) and loan-loss
provisions to increase to 1.1% from 0.7% in FY2011. While we build slippages rising from a
cyclical perspective (high interest rates and slowing economy), we believe that IndusInd Bank
has seen a marginal increase in riskiness of the portfolio—new business emerging in higher
delinquent portfolios like credit cards (1% of loans) and used vehicle finance (5% of loans).
Fee income growth impressive at 30% yoy
Non-interest income grew impressively by 36% yoy to `2.4 bn while performance on the
core fee income was equally strong at 30% yoy to `2.1 bn. We note that the improvement
in core fee has been driven by almost all sub-verticals like forex, third party, trade fees and
processing. Income from investment banking was weak qoq. We are building fee income to
grow by 26% CAGR for FY2011-13E.
Other highlights for the quarter
Cost-income ratio at 49% was higher than our estimates mainly due to higher non-staff
expenses. Staff costs grew by 21% yoy while non-staff costs grew by 43% yoy. We
broadly expect this ratio to be maintained at current levels. The bank opened 24 branches
and 33 ATMs for the quarter, taking the total branch network to 350 and ATMs to 666.
Capital adequacy ratio stands at 14.3% with Tier-1 currently at 11.4%. Given the current
headroom and healthy return ratios, we believe that the current capital position is
comfortable for near-term growth.
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