1. Edelweiss puts ‘Buy’ on IndusInd Bank, target price at Rs 1560

Edelweiss puts ‘Buy’ on IndusInd Bank, target price at Rs 1560

IndusInd Bank’s (IIB) Q4FY17 operating performance held it in good stead,with core operating profit moving up >30% y-o-y.

By: | Published: April 21, 2017 5:32 AM
Following successful completion of Phase-3, IIB unveiled Phase-4 and targets to repeat its success of earlier phases. (Credit: Indusland Bank)

IndusInd Bank’s (IIB) Q4FY17 operating performance held it in good stead,with core operating profit moving up >30% y-o-y. However, higher credit cost restricted PAT growth to 21% y-o-y. Provisions rose (up ~2x q-o-q) as bank made one-off provision (Rs 1.2 billion) against a large corporate standard asset, largely technical in nature and is likely to reverse by Q1FY18. Strong core revenue traction, supported by superior NIMs (4%), above industry loan growth and sustenance of core fee momentum; and healthy traction in savings accounts (up >56% y-o-y/7% q-o-q) taking CASA to ~37%. Even so, RBI directive on recognition & stress reporting divergence may have near term overhang (for sector as a whole), but, given superior retail franchise, bank seems to be better placed than other corporate banks.

Following successful completion of Phase-3, IIB unveiled Phase-4 and targets to repeat its success of earlier phases. Given strong track record, superior RoA & well-capitalised position, execution risks are minimal. IIB unveiled its strategic planning cycle (PC4), which focusses on six broad themes viz: Rebalancing loan book: Tilt towards non-vehicle segment which will support margins and improve RoRWA; Rural Banking and MFI: Will contribute >10% of profits; Digital focus: Will comprise 14% of profits by FY20; Internal collaboration & cross-sell: Will rise to 6x of current run rate; Productivity focus: Will lower cost/income ratio by 2% by FY20; and Customer focus: CASA ratio to cross >40%.

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While headline asset quality was stable (GNPLs at 93bps), credit cost increased as IIB made one-off provision (Rs 1.2 billion) against a large corporate standard asset (Rs 5 billion exposure). The bank highlighted this was for a bridge loan for a Merger & Acquisition in cement industry, which is expected to be done by Q1FY18 and consequently is hopeful of reversal. IIB maintained its guidance of delivering sub-60bps credit cost for FY18.

IIB intends to lower cyclicality in business by: lowering CV proportion (by raising proportion of non-vehicle retail book); and moving towards better rated corporates, drawing support from strengthened liability franchise (lower funding cost). Superior growth, higher fee income and stable credit costs will help it sustain >25% earnings CAGR over FY17-19E. The stock trades at 3.1x FY19E P/ABV. We maintain ‘BUY/SP’ with TP of Rs 1,560 (3.5x FY19E P/ABV).

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