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%.
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).