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IndusInd Bank has outperformed the benchmark BSE Bankex by 200% since May 2008 as its
turnaround efforts have gained ground. However, we expect ROAs to improve gradually over
FY12-14 as gains in NIM and fee income are partly offset by higher operating costs. We initiate
coverage with a Hold.
Turnaround has taken root…
With net profit nearly quadrupling to Rs5.8bn during FY09-11, IndusInd has seen a remarkable
profitability turnaround, based on: 1) NIM expansion (from a trough of 1.5% in FY08 to 3.6% in
FY11); 2) a growing fee income franchise (FY09-11 CAGR of nearly 40%; 0.7% of assets in
FY11); and 3) credit cost moderation even as provision cover expanded (73% as of March 2011
vs 30% in FY09). In addition, operating costs have risen but remain well under control despite a
larger branch network (326 as of June 2011 vs 180 in FY09) and a trebling of its employee base
to about 7,000. We estimate FY12 ROE of 17.8% and ROA of 1.44%, which we expect to be in
line with those of its peers despite two rounds of equity raising over the past three years.
… but we see no near-term triggers
We expect the net interest margin to come down by 6bp yoy to 3.5% in FY12. We believe that
earnings growth will slow due to a combination of: 1) moderating low-cost CASA deposit
momentum; 2) high funding costs (our analysis indicates that the bank’s cost of term deposits and
borrowings has risen about 170bp vs the 3QFY11 level); and 3) moderating auto and corporate
loan demand.
Initiate coverage with a Hold rating and a target price of Rs301
With structural rebalancing still under way, we believe IndusInd remains a quality holding among
smaller Indian banks. However, we initiate coverage with a Hold rating due to a combination of
what we see as expensive valuations (2.9x FY12F BV) and a lack of near-term earnings triggers.
Our EVA™-based target price is Rs301 (9% potential upside). Going forward, we see the bank’s
key challenge being to improve ROA from the current 1.5% level. We expect ROAs to improve
from 1.44% in FY12 to 1.54% in FY14 (vs 85bp growth to 1.43% during FY09-11). Even if the
NIMs and fee income surprise on the upside, we believe that the potential increase in credit costs
due to a maturing loans book will offset each other and lead to a more stable ROA.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IndusInd Bank has outperformed the benchmark BSE Bankex by 200% since May 2008 as its
turnaround efforts have gained ground. However, we expect ROAs to improve gradually over
FY12-14 as gains in NIM and fee income are partly offset by higher operating costs. We initiate
coverage with a Hold.
Turnaround has taken root…
With net profit nearly quadrupling to Rs5.8bn during FY09-11, IndusInd has seen a remarkable
profitability turnaround, based on: 1) NIM expansion (from a trough of 1.5% in FY08 to 3.6% in
FY11); 2) a growing fee income franchise (FY09-11 CAGR of nearly 40%; 0.7% of assets in
FY11); and 3) credit cost moderation even as provision cover expanded (73% as of March 2011
vs 30% in FY09). In addition, operating costs have risen but remain well under control despite a
larger branch network (326 as of June 2011 vs 180 in FY09) and a trebling of its employee base
to about 7,000. We estimate FY12 ROE of 17.8% and ROA of 1.44%, which we expect to be in
line with those of its peers despite two rounds of equity raising over the past three years.
… but we see no near-term triggers
We expect the net interest margin to come down by 6bp yoy to 3.5% in FY12. We believe that
earnings growth will slow due to a combination of: 1) moderating low-cost CASA deposit
momentum; 2) high funding costs (our analysis indicates that the bank’s cost of term deposits and
borrowings has risen about 170bp vs the 3QFY11 level); and 3) moderating auto and corporate
loan demand.
Initiate coverage with a Hold rating and a target price of Rs301
With structural rebalancing still under way, we believe IndusInd remains a quality holding among
smaller Indian banks. However, we initiate coverage with a Hold rating due to a combination of
what we see as expensive valuations (2.9x FY12F BV) and a lack of near-term earnings triggers.
Our EVA™-based target price is Rs301 (9% potential upside). Going forward, we see the bank’s
key challenge being to improve ROA from the current 1.5% level. We expect ROAs to improve
from 1.44% in FY12 to 1.54% in FY14 (vs 85bp growth to 1.43% during FY09-11). Even if the
NIMs and fee income surprise on the upside, we believe that the potential increase in credit costs
due to a maturing loans book will offset each other and lead to a more stable ROA.
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