IndusInd Bank 4Q13: Solid quarter, treasury drives surprise :: JPMorgan

IndusInd Bank reported Rs 3.35bn 1Q14 PAT, +42% y/y and 10%>JPMe.
The main surprise was driven by treasury and forex fees, despite an
Rs500m floating provision. Overall, operating numbers remain solid with
margins and asset quality holding up and strong savings momentum
continuing. We raise our PT to Rs550 on better LT growth outlook, and
maintain OW. We see IndusInd as a strong secular pick – the strong retail
asset franchise is now being supplemented by deposit momentum. Product
(and hence risk) diversification is helping raise ROAs and improve
earnings quality, all of which support the valuations of 3x FY14 PB.

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 Asset quality holds up. The low base drove a 10% q/q expansion gross
NPLs, though the ratio remains low at 1.06% (up 3bp q/q). The retail
segment is seeing upward normalization with 1.5% gross delinquency in
1Q14. The CV business is seeing strain with the NPA ratio climbing
16bp q/q to 1.17%. We are neither surprised nor alarmed – this was
anticipated and could persist. Our 73bp credit cost estimate for FY14E is
in line with the 1Q numbers (ex-floating provisions). The one-off
treasury gains was utilized for a Rs500m floating provision this quarter
and this policy will likely continue for future non-recurring gains.
 Strong SA momentum. The investments in distribution seem to be
paying off as SA balances grew 12% q/q, driven by strong growth in
average balances. The accelerating momentum on savings accounts
could be the pivot around which IIB builds the growing retail franchise -
we see this as a significant positive. Management expects the run-rate to
last through FY14E - part of the driver is maturing branches from the
expansion of the last 18-24 months.
 Treasury drives non-interest income. Non-interest income grew 48%
y/y, led by 2.1x y/y jump in treasury income. Management clarified that
this was a tactical utilization of benevolent bond markets in 1Q and is
unlikely to recur. Core fee income grew 31% y/y, with forex and IB the
key drivers. We think this could temper going forward, purely on the
base effect (40%+ annual growth in FY11-13) but should still remain
robust in the mid-20s.