IndusInd Bank : Sailing well in precarious environment… : ICICI Securities

Sailing well in precarious environment…
• IndusInd Bank (IIB) continued its good run with an excellent quarterly
performance and ended FY14 on a strong note
• Q4FY14 PAT was up 29% YoY to | 396 crore (I-direct estimate: | 379
crore) while full year FY14 PAT increased 32.7% YoY to | 1408 crore
• Improvement in margins (up 10 bps QoQ to 3.75%) along with
higher-than-expected loan growth (up 24% YoY to | 55102 crore),
robust other income traction of 42% YoY to | 523 crore in Q4 and
steady asset quality QoQ enabled strong profitability
• Under planning cycle III (strategy for FY14-FY17), the focus would be
on doubling the branch network to 1200, loans CAGR of 25-30%,
CASA of > 35% and fee to exceed loan growth

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Turnaround done successfully; well poised for growth ahead of industry
The current management after taking over in early 2008 has transformed
IndusInd Bank (IIB) from low and volatile B/S growth to steady and
sustainable growth with strong profitability. We like the fact that the
transformation has been a qualitative one (RoA up from 0.3% to 1.8% as
on FY14) despite the turbulent economic scenario. The loans, deposits &
PAT traction improved to 28%, 21% & 63% CAGR, respectively, over
FY08-14 from 12%, 13% and -35% during FY05-08. The loan & deposit
base, as on FY14, stands at | 55102 crore and | 60502 crore, respectively.
We believe, going ahead, considering the current weak economic
outlook, the traction will moderate from past trends but remains ahead of
the industry. We have factored in loan & deposit CAGR of 21% over FY14-
16E while PAT is estimated to increase at 24% CAGR to | 2180 crore.
Margins improve sharply; expected to remain largely steady
IIB’s FY14 calculated NIM of 3.95% is highest after HDFC Bank and Kotak
Mahindra Bank. The high yielding nature of loan book & healthy CASA
franchise enable IIB to maintain such strong margins. In the past six
years, IIB’s margins have improved from 1.7% to 3.7% as on FY14. Such
a structural improvement is primarily on the back of a substantial
improvement in CASA franchise (doubled to >30% over the past six
years), which has helped keep CoF under control across various cycles.
We expect calculated NIM to stay largely flat YoY at ~4% in FY15E.
Diversified asset book enables superior asset quality
IIB has fared well over the years in terms of asset quality with GNPA ratio
improving from 3.1% in FY08 to 1% by FY11 and has stayed at around
these levels currently. The steady performance on the asset quality front
is owing to IIB’s peculiar loan mix. The asset book is evenly divided
between consumer finance (CF) (~80% of which is the high vehicle
financing) and corporate banking (CB) (working capital in nature & well
diversified across industries). Though concerns are being raised about CV
portfolio (17% of the total book), there has been no drastic deterioration
yet. Going ahead, we expect a slight rise in slippages and expect the
GNPA ratio to rise to 1.2% to | 788 crore by FY15E.
Visibility in earnings much better than peers; maintain HOLD
Despite our factoring in a moderation in asset growth coupled with
largely flat margins and a rise in credit cost, our earnings estimate for IIB
is healthy at 24% CAGR over FY14-16E. Expected return ratios of ~18%
RoE and ~1.8% RoA provide comfort. The stock has run up swiftly in the
last two months. Currently, it is trading at 2.5x FY15E ABV and 2.2x FY16E
ABV. We believe any major improvement in margins and loan growth is
three to four quarters away. We maintain HOLD with target price of | 510.