PAT beat on stronger fee income: Q4FY15 profit after tax was 8% higher than our expectation led by better loan growth and strong fees. IndusInd Bank (IIB) has been delivering well on: (i) core fees, with strong momentum in distribution fees and some uptick in loan processing fees; (ii) loan growth; while it continues to be driven by corporate segment, some pickup is seen in CVs (commercial vehicles) and (iii) SA (savings account) accretion despite some reduction in rates.
The only negative surprise was higher asset sales of R4.2bn but remains largely pro-active; we would not extrapolate this into FY16F (forecast). We lift our TP (target price) to R1,025 from R900 as we fine tune our capital dilution assumption and assign a higher multiple due to improving growth trajectory.
Q4FY15 highlights: (i) Loan growth improved to 25% year-on-year, led by continued momentum in corporate/non-vehicle retail segment and an uptick in CV book (up 6% q-o-q); (ii) fee growth momentum continues to be strong at 29% y-o-y and growth is now more broad-based with strong momentum in distribution and loan processing fees, and (iii) asset quality was a negative surprise with ARC (asset reconstruction company) sales to the tune of R4.2bn, which led to coverage drop of +700bps q-o-q.
Asset quality: While ARC sale was surprisingly higher than expected, IIB indicated that it aggressively wrote down the value of asset sold and hence will not lead to any further deterioration in value. IIB is also confident of stable asset quality going forward and will maintain LLPs (loan loss provisioning) under 65bps for FY16F despite the impact of this ARC sale (12 bps annualised).
Valuations: We lift our TP to R1,025 (from R900) as we build in marginally higher capital dilution of 7% in FY17F vs 6% earlier and increase our target multiple to 3.1x from 2.9x earlier on better growth trajectory. Current valuation at 2.8x Mar-17 book of R327 does not seem unreasonable, but higher profitability and potential upside surprise on growth justify a higher multiple, in our view.
Analysts’ meet highlights
* While loan growth still continues to be driven by corporate growth (27% y-o-y growth) and non-vehicle retail book (62% y-o-y), there has been clear signs of pick-up in vehicle finance book that grew 8% y-o-y vs 2.4% y-o-y in Q3.
* LAP (loan against property) book remains the key growth driver, which grew 50% y-o-y.
* NIMs (net interest margins) were largely flat q-o-q with 17bps q-o-q drop in yields being offset by 18bps q-o-q decline in cost of funds.
* IIB expects the loan mix to become favourable from here, which should help offset NIM pressure from lower yields on corporate book and aid margins.
* Fee growth continues to be strong for IIB and the management guides to continue to grow its fees above balance sheet growth.
* Core fee was supported by continued momentum in distribution fees. Strong traction in third-party fee is supported by better mutual fund volumes. Higher loan growth led to strong loan processing fee.
* SA momentum remains strong, with q-o-q accretion of R7.6bn. IIB is confident of maintaining the momentum despite a reduction in rate in the <R0.1m and in R1-0.1-1m bucket.
* IIB sold loans of R4.2 bn (net book value of R3.2 bn) to ARC during the quarter. One account was already an NPA (non-performing asset) and other three accounts were stressed. IIB received security receipts of R0.6 bn against this. The bank chose to amortise the impact of this over eight quarters and the impact in this quarter was to the tune of R0.32 bn which will recur for the next seven quarters. Restructured book remained flat q-o-q with no addition in the quarter.
* Asset sales led to +700bps drop in provision coverage but the management is confident of maintaining credit cost under 65bps for FY16F as well.