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IndusInd Bank (IIB)
Banks/Financial Institutions
Impressive earnings quality; retain BUY. IndusInd Bank reported another strong
quarter with net profits growing by 52% yoy on the back of impressive revenue/loan
growth and stable asset quality. Execution from the management has been impressive
on all parameters which should result in sustenance of the premium valuations at which
the bank is currently trading (2.8X FY2013E book). We retain our BUY recommendation
and increase our TP to `325 (from `315 earlier), valuing the bank at 3.1X book and 18X
EPS for RoEs of about 18% and over 20% EPS growth for FY2011-13E.
Limited concern in business despite headwinds; maintain BUY
We maintain our BUY rating with TP of `325, despite strong price performance and reasonably
rich valuations compared to peers on back of an impressive execution by the management on
most operating metrics. We are valuing the bank at 3.1X book and 18X FY2013 EPS delivering EPS
growth of about 20% CAGR and RoEs in the range of 18% for FY2011-13E.
We broadly maintain our positive outlook on the bank’s core business as (1) loan growth is likely
to remain healthy despite volume headwinds in the vehicle business, as the bank has been
improving market share as well as investing in alternate business like used vehicle financing and
loans against property. (2) Fee income trends to remain stable as the bank has invested in new
initiatives like housing loan origination and investment banking. (3) Asset quality and provisioning
trends to remain stable as we don’t expect NPLs to pick up sharply in the near term though we
assume higher provisions in our estimates.
Higher corporate lending yields cushion sharp rise in deposit costs; margins decline 10 bps qoq
NIMs for the quarter declined marginally by about 10 bps qoq to 3.4% levels led by improvement
in asset yields and CD ratio. Yields on the corporate loan portfolio showed further improvement of
90 bps qoq while investment yields (calc) improved 60 bps qoq. CD ratio improved to 81% from
76% in 4Q. Cost of deposits increased by 70 bps qoq to 7.7%. CASA ratio improved 100 bps.
While we build NIMs to decline by about 20 bps yoy in FY2012E, we believe that IndusInd Bank
has scope to surprise positively, especially from 3Q onwards as deposit costs may start to come off
from 3Q onwards. Deposit costs have re-priced upwards by over 170 bps in the past three quarters
(one of the highest among peers) and the bank has seen only about 20 bps decline in margins
during this period.
Loan growth healthy; limited headwinds witnessed in retail
Loans grew by 31% yoy (8.5% qoq) to `284 bn with retail loans growing by 42% yoy and
the non-retail portfolio growing by 24% yoy. Despite headline volumes showing signs of
slowdown, the vehicle loan portfolio of the bank continues to grow impressively with CV
loans growing by 40%, 2/3-wheelers by over 35%. The bank has strengthened its used
vehicle finance portfolio during the quarter (contributing to 15% of disbursements in this
portfolio from 10% earlier). Loans from credit cards contributed to about 80 bps.
We broadly maintain our positive outlook on loan growth for the bank at 25% CAGR for
FY2011-13E, given the relatively smaller balance sheet size of the bank, the attractiveness of
the target segments and new initiatives in used vehicle loans, loans against property and
credit cards.
Slippages trends stable despite higher additions to gross NPLs
Gross NPL showed an increase of 16% qoq to `3.1 bn (1.1% of loans) from `2.7 bn (1% of
loans) in the previous quarter. However, slippages trends have been stable at 1.1%
compared to 0.9% in 4Q. We believe the sharp rise in gross NPLs is probably due to lower
write-offs during the quarter. We are not seeing any sharp rise in delinquency trends across
its retail portfolio currently. We have not seen higher NPLs from the credit card business also,
based on the retail NPLs disclosed for the quarter.
Loan loss provisions (annualized) were at 0.6% for the quarter. Entry into the marginally
higher risk segment of used vehicles and credit cards would imply a rise in slippages from
FY2012-13E and we are building loan loss provisions to be 1.1% in FY2013E.
Core fee income impressive driving overall non-interest income growth
Non-interest income grew impressively by 34% yoy to `2.1 bn while performance on the
core fee income was better than the past few quarters at `1.8 bn. We note that the
improvement in core fee has been driven by forex, third party and trade fees Income.
Income from investment banking was weak qoq. We are building fee income to grow by
26% CAGR for FY2011-13E.
Other highlights for the quarter
Cost-income ratio for the quarter was at 48.5% and we expect this trend to be
maintained at current levels for FY2012-13E. The bank opened 26 branches and 39 ATMs
for the quarter taking the total branch network to 326 and ATMs to 633.
Capital adequacy ratio stands at 15.0% with tier-1 currently at 11.7%. Given the current
headroom and healthy return ratios, we believe that the current capital position is
comfortable for near-term growth.
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