IndusInd Bank: Trends unchanged :: Kotak Sec,report

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Trends unchanged. 3QFY15 marked a strong quarter with earnings growth of 29% yoy
led by healthy revenue growth and lower provisions. Loan growth of 22% yoy was led by
the corporate segment. IIB is well-placed compared to peers as (1) macro recovery, lower
crude prices and softening of interest rates should result in better retail loan growth and
upsides to NIM and (2) strong execution is leading to a diversified balance sheet, better
revenue mix and improvement in CASA. Maintain ADD; TP at `870 (from `830 earlier).

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A stable performance overall
IndusInd Bank delivered a stable performance with an impressive earnings growth of 29% yoy
on the back of 22% yoy revenue growth and 22% decline in provisions due to reversal of
interest rates. Revenue growth was led by strong growth in non-interest income at 27% yoy,
primarily due to higher contribution from treasury (13% of PBT). NIM was stable qoq at 3.7%
while the bank grew its loans by 22% yoy. Retail loans grew 10% yoy while non-retail loans
grew 32% yoy. Impairment ratios were stable with gross NPLs at 1.1% and restructured loans
at 0.6% of loans.
Well-placed among peers in the current environment
We find the bank well-placed among peers in the current environment. We expect NII growth
to lead revenue growth over the next few quarters led by (1) decline in funding costs, especially
on wholesale deposits, and (2) change in loan mix towards high-yielding retail assets. While the
former is already visible as funding costs are softening, the healthy disbursement growth should
offset the high repayments that the balance sheet has been seeing in the retail portfolio in the
next few quarters. Further, the broad call is that the bank would see a far more diversified loan
book in retail at the end of this cycle. Lower crude prices and early signs of a macro recovery
augur well for the bank’s CV portfolio.
Our positive view stays but strong outperformance unlikely; maintain ADD
At 3.4X book and ~20X September 2016E EPS, IndusInd Bank is one of the most expensive
Indian bank stocks. While we don’t see huge upsides from current levels, we see the bank as a
strong earnings compounding idea as against banks that can provide multiple expansion.
Valuations, in our view, are at the upper end, giving little headroom for expansion from current
levels. The bank has consumed capital very aggressively in this cycle with tier-1 ratio at 11.5%
but it represents the change in mix in business and higher allocation of capital to non-fund-based
business, which may imply that the bank could look at dilution over the next few quarters. The
stock is pricing in a strong recovery in business and assigning a high probability of success on most
of the recent initiatives taken by the bank. Our positive view is driven by the superior execution,
strong return ratios and scalability of the business given the size of the bank and opportunity in
the market. We have increased our earnings and TP to `870 (from `830 earlier). Maintain ADD.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily14012015bb.pdf