1. IndusInd Bank rated Hold by Jefferies, says returns in line with earnings growth

IndusInd Bank rated Hold by Jefferies, says returns in line with earnings growth

26% EPS CAGR forecasted over FY17-20e; valuations top of range; returns to be in line with earnings growth.

By: | Published: September 18, 2017 4:15 AM
IIB entered into an exclusivity agreement to acquire BHAFIN (Bharat Financial Inclusion)— timeline & costs awaited. (PTI)

IIB entered into an exclusivity agreement to acquire BHAFIN (Bharat Financial Inclusion)— timeline & costs awaited. The deal check-boxes IIB’s NIM/growth hunger and is EPS accretive. IIB’s valuations though are top of the range. We expect the stock to deliver returns in line with earnings growth.

Dilution at 12.5%, EPS accretive in FY18e, but a large share of MFI loans. Assuming IIB acquired BHAFIN at current market price, this implies a swap ratio of 1.85 or roughly a dilution of 12.5%. The deal seems to be EPS accretive by about 1.2%. However, the share of MFI loans would be almost 10% of the portfolio.

Merged entity to benefit from lower interest outgo marginally: Street chatter seems to suggest that the merged entity will benefit as the merging entity (i.e. BHAFIN) will benefit from the lower funding cost of IIB. That’s only partially correct as BHAFIN has a loan book less than a tenth of size of IIB.

The greater benefit is on growth and yields: IIB has traditionally focused on chasing growth and yields. The gross yield for BHAFIN was about 19.7% compared to 11.5% at IIB, while the NIM was 9.1% and 4% respectively in Q1FY18. However, the delta could arise from higher growth. BHAFIN has been rejecting ~30% of loan proposals based on Credit Bureau queries.

Within these, almost 48% are where a customer has already taken loans from 2 or more MFIs making a third MFI loan invalid (per RBI regulation). The merged entity will not have any such limitation and would most likely force taking over the entire portfolio and refinancing it using its own balance sheet.

No change in est. We are not making any change in estimates. Our current forecast builds in 26% EPS CAGR over FY17-20E. Valuation/Risks: IIB currently trades at 5.2x P/B (Jun 17) and 27.9x P/E (12m to Jun 18E). Comparative 5-year average is 2.96x/18x respectively. Risks: Upside — Sustained strong loan growth, higher than expected fall in cost of funding. Downside — Slower loan growth, asset quality.

That’s only partially correct as BHAFIN has a loan book less than a tenth of size of IIB. The greater benefit is on growth and yields: IIB has traditionally focused on chasing growth and yields. The gross yield for BHAFIN was about 19.7% compared to 11.5% at IIB, while the NIM was 9.1% and 4% respectively in Q1FY18. However, the delta could arise from higher growth. BHAFIN has been rejecting ~30% of loan proposals based on Credit Bureau queries. Within these, almost 48% are where a customer has already taken loans from 2 or more MFIs making a third MFI loan invalid (per RBI regulation). The merged entity will not have any such limitation and would most likely force taking over the entire portfolio and refinancing it using its own balance sheet. No change in est. We are not making any change in estimates. Our current forecast builds in 26% EPS CAGR over FY17-20E.

Valuation/Risks: IIB currently trades at 5.2x P/B (Jun 17) and 27.9x P/E (12m to Jun 18E). Comparative 5-year average is 2.96x/18x respectively. Risks: Upside — Sustained strong loan growth, higher than expected fall in cost of funding. Downside — Slower loan growth, asset quality.

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