1. Morgan Stanley gives IndusInd Bank ‘Overweight’ rating; here’s why

Morgan Stanley gives IndusInd Bank ‘Overweight’ rating; here’s why

Earnings helped by accelerating net interest income growth, stable fee income, and strong asset quality

By: | New Delhi | Published: October 17, 2016 6:23 AM
IndusInd  Bank (Representative Image) IndusInd Bank (Representative Image)

Strong revenue growth of 30% y-o-y: This was driven by acceleration in net interest income growth (32% y-o-y vs. 23% last quarter, per share basis), now growing faster than fee income growth (23% y-o-y). Margins improved

3 bps q-o-q to 4% (12 bps y-o-y) helped by lower funding costs (higher CASA, lower bulk deposit costs) and higher share of fixed rate loans. Loan growth was strong at 26% y-o-y. Both corporate (25% y-o-y) and consumer book (28% y-o-y, incl. Business banking) did well. Within consumer loans, vehicle loans grew 22% y-o-y, while non-vehicle loans grew 42% y-o-y helped by business banking (36% y-o-y), LAP (36% y-o-y) and credit cards (59% y-o-y). Consumer loans (incl. business banking) constituted 48% of total loans (vs. 47% last year). Core fee income grew 23% y-o-y—most segments did well except FX income, which fell 8% y-o-y due to lower FX volatility.

Strong asset quality; discussion on LAP exposure provides some comfort

GNPL formation moderated q-o-q (1.3% of loans, annualised vs. 1.4%). Credit costs and impaired loans ratio was broadly stable. With respect to the LAP segment, management highlighted that NPA ratios have been stable on y-o-y basis at 0.4% and exposure to relatively riskier NCR region is low at 15% of LAP book (<1% of overall loan book). Even the indirect exposure (via NBFCs) is not high. The bank has 4-5 accounts under discussion for SDR— however, the quantum is quite low. Pipeline for S4A or 5:25 refinancing is nil.

Stay OW, Raise Price Target

Our 17% PT increase is driven by: roll-forward of valuation reference year by six months; lower CoE on falling rates; and higher net interest margins in medium term. The stock is our preferred pick given strong balance sheet (Tier 1 ratio of 14.7%, low impaired loans ratio of 1.6%), high profitability, diversified loan/ revenue mix, new growth opportunities (MFI, rural) and expanding distribution network. This should drive sustained strong earnings compounding, in our view.

Strong balance sheet, high profitability

  • Well positioned for the longer term given: strong retail franchise; the company is still in the early stages of growth with multiple growth drivers; management has done a solid job of delivering key metrics.
  • The company has rapidly expanded its distribution network – it expects to grow its branch network to 1,200 by FY17 (+20% y-o-y).
  • Balance sheet and profitability metrics are robust: (i) low exposure to stressed assets; (ii) good Q2FY17 B3 CET1 ratio at 14.7%; (iii) low impaired loan ratio (FY16) at 1.3% (1.6%including security receipts).
  • Profitability is strong and is likely to improve as vehicle loan growth accelerates: We expect 27% EPS CAGR during F16-19e.
  • Valuation at 3.1x F18e P/BV and 19.1x P/E looks attractive amid strong earnings compounding.

Risks to achieving PT

Slowdown in CASA owing to higher competition and moderation in interest rates; sharp slowdown in loan growth; material pickup in slippages from the midmarket corporate banking book.

Price target discussion

We raise our price target from Rs 300 to Rs 525. We use a probability-weighted residual income model with three-phases—a five-year high-growth period and a 10-year maturity period, followed by a declining period. We use a cost of equity of 13.25% (down from 13.5% earlier), assuming a beta of 1.1 (unchanged), a risk-free rate of 7.25% (lowered from 7.5%) and a market risk premium of 5.5% (unchanged). We use probability weights of 65% for the base case; 10% for the bear case (to factor in the risk of a double dip in the economy), and 25% for the bull case (reflecting the probability of a V-shaped economic recovery, which our economists view as a slightly greater likelihood).

Our probability weightings remain unchanged. We increase our price target by 17% driven by: rolling-forward of reference year for valuation by 6 months from June-17 to Dec-2017; lower cost of equity given lower rates; and higher net interest margins over the medium term.

Get latest news and updates on Auto Expo 2018, check breaking news on Budget 2018, like us on Facebook and follow us on Twitter.

  1. No Comments.

Go to Top