We initiate coverage on IndusInd Bank with a Buy rating. Post smooth transition brought by incumbent senior
management, the bank has been strengthening itself gradually in each of the key areas. Well-diversified retail
loan book, more focus on relatively newer retail product lines and improvement in SA deposits hereon would
aid margin. Core fee income would continue robust performance with investment banking, trade finance and
forex income. High T ier I capital warrants the bank’s strong business growth without raising additional equity
capital in near future. We rate the stock as a Buy with a target price of ` 434 at 3.1x ABV FY14. At current
market price, the stock trades at 3.0x and 2.5x ABV FY13 and FY14 respectively
Margin expansion with increase in high-yielding credit composition and
expected improvement in SA deposits: We believe that IndusInd Bank
(hereinafter IIB) would witness improvement in margin in FY13 mainly on the
back of increase in overall CASA deposit share and increase in high-yielding
credit composition in the loan portfolio.
On deposit front, it is expected that SA deposit share would improve to 14.5% in
FY13 and further to 17.5% in FY14. On credit book front, the bank is expecting to
increase its loan book composition of credit card business and LAP (Loans against
properties) business. We expect RIDF investments to further come down due to
expected increase in CV, business banking and loans to small business leading
to overall increase in PSL lending, which would further aid margin.
Branch expansion plan: IIB plans to add around 110 and 115 branches in FY13
and FY14 respectively. On ATMs, the bank would take total count to 940 by the
end-March’13. We believe that basic reason for continued branch expansion is to
mobilize SA deposit and to expand retail term deposit base.
SA deposit per branch has been on continuous uptrend over years with ` 117mn
per branch as on end-FY12. For IIB, there exists a lot of scope of improvement on
this front. Bigger private sector banks’ average level of SA deposit per branch is
close to Rs 300mn.
Robustness in core fee income to remain in investment banking, trade &
remittance and foreign exchange income: IIB’s core fee income line is
expected to continue robust performance. Key reason for much higher growth
would be better prospects in ‘Trade & Finance’, ‘Foreign exchange income’ and
‘Investment banking income’.
On retail side, the bank’s been generating fee income by cross-selling third-party
products to existing customers & pushing it to potential retail customers. In
FY12, IIB recorded 47% YoY jump to ` 1.0bn in life insurance product commission.
On corporate side, each of the four corporate SBUs has been doing exceedingly
well. ‘Corporate & investment banking unit’ earned fee income close to ` 1.0bn
with sharp increase in addition of new clients. Investment banking division also
posted strong performance with 31% YoY rise to ` 790mn.
Asset quality firm with improvement in NPLs in CV and two-wheelers
segments; the bank’s management sounded confident on asset quality: Over
the year during FY12, the bank witnessed improvement in asset quality in each of
the retail segment barring utility vehicle loans and three-wheelers loans. In utility
loans and three-wheelers loans, GNPA almost doubled to ` 160mn and ` 180mn
respectively. Overall, in FY12, the bank contained its net slippages at 0.43% (as
against 0.46% in FY11) and asset quality remained stable with GNPA below 1.0%
mark. Provision coverage level remained strong at 73%. IIB does not have any
floating provisions outstanding.
Capital adequacy and promoters’ stake dilution: In FY12, IIB’s credit risk capital
requirements increased in-line with credit book & credit substitute. Capital
requirements for credit risk grew by 36% & 27% and credit book & credit substitute
book expanded by 32% and 27% in FY11 and FY12 respectively. After factoring in
25% (cagr FY12-14) credit book, tier I capital would be close to 11% by the end-
FY13. The bank is not in an urgency to raise equity capital, though the bank might
raise equity capital by the end of FY14.
Marginal increase in credit book average maturity and reduction in deposit
maturity; introduction of 400 days and 999 days retail deposit products to
balance out ALM: Over the last two years, we witness gradual increase in average
maturity of credit book; IIB’s credit portfolio average maturity was close to 1.0 year
as on end-FY10, it increased to around 1.4 years by end-FY12. With introduction
of two retail deposit products of 400 days and 999 days at highest interest rate of
9.5%, the bank would be able to bridge the gap in ALM.
Valuation
We assume that the bank’s business would expand at 24.3% cagr (during FY12-
14) with improvement in margin in FY13 and being flat in FY14. Core fee income
would remain robust. The bank does not face any significant asset quality issues
so far in any of the credit segments; going forward, the bank’s management does
not foresee any pipeline of loan restructuring. We do not factor in return ratio dilution
due to equity raising plan since the bank is sitting on high tier I capital (11% as on
end-June’12). With RoAA of 1.6% and RoAE at 21%, we determine the bank’s
intrinsic worth at ` 434 at 3.1x adjusted book value FY14. We rate the stock as a
Buy with a target price of ` 434.
Key risks to our call:
Sudden drop in business growth: Drop in business expansion pace would be
a key risk. Though, since the end-June’12, the bank’s management has been
sounding confident of expanding its business at 25%-30% rate. At present,
there is no meaningful change in banking industry’s credit and deposit growth
since end-June’12 and the central bank also expects credit growth at 17% rate.
Therefore, there is no justification to assume a significant moderation in business
expansion at current juncture.
Drop in saving deposit mobilization: A major contribution in margin
improvement would come from higher SA deposit mobilization. Deviation in SA
deposit share from our expectations would lead to lesser margin than estimated.
Increase in gross slippages: Sharp increase in slippages in CV and Utility
vehicle segments is not foreseen at this point of time. The bank does not operate
in fleet segment (under CV segment), which is undergoing pain. Also, in corporate
loan front, the bank’s management does not have any pipeline for loan
restructuring.
Change in top management: We witness that almost all the positive changes
brought in the bank was done by the incumbent senior management; any change
in the management (particularly top management) would be negative for stock’s
price performance. Though, the top management has already got renewal of its
tenure in office, therefore we do not visualize this as a risk at the moment.
Promoters’ group a new NBFC startup: The new NBFC could create a conflict
of interest between the bank and the NBFC. Since in accordance with RBI’s
current stipulations, the promoter has to bring down its stake to 10% by the
end-December’12 and after losing controlling stake in IIB, for maintaining its
presence in domestic financial markets, the promoter would like to have some
entity (NBFC) with a controlling stake. We do not expect any kind of favoritism
offered by IIB to the NBFC. But, in a very later stage, merger of this NBFC with
the bank might be a possibility providing the promoters with a sizeable stake in
the bank again. At current juncture, the probability of the event appears to be
quite remote and very far on the horizon.
Valuation
We assume that the bank’s business would expand at 24.3% cagr (during FY12-
14) with improvement in margin in FY13 and would be flat in FY14. Core fee income
would remain robust. The bank does not face any significant asset quality issues
so far in any of the credit segments; going forward, the bank’s management does
not foresee any pipeline of loan restructuring. We do not factor return ratio dilution
due to equity raising plan since the bank is sitting on high tier I capital (10.6% as
on end-June’12). With RoAA of 1.6% and RoAE at 21%, we determine the bank’s
intrinsic worth at ` 434 at 3.1x adjusted book value FY14. We rate the stock as a
Buy with a target price of ` 434.
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