IndusInd Bank?s NIM has improved to 3.61% (from 1.84% in Q4FY08), fee income to average assets has increased to 1.7% (from 1.1%), C/I ratio has declined to 48% (from 69% in Q4FY08) and RoA has improved to 1.5% (from 0.3% in Q4FY08).
The new management team, led by MD Romesh Sobti, took charge in February 2008 and has since been effecting structural and operational changes to improve productivity and efficiency, leading to strong improvement in core operating performance of the bank. Having achieved RoA of about 1.5%, we believe the management?s focus would now be on scalability. We expect RoA to remain at about 1.5%, led by the bank?s core retail liability-driven strategy.
Prior to the new management taking over, IndusInd Bank faced a problem of identity crisis along with impaired earnings and assets, which led to a significant deterioration in financial ratios. After the taking over by the new management, the bank?s branch network has increased by 50% in the last one year to 270 and plans are afloat to add 100 branches every year. It has also introduced operational changes in terms of organisation and risk management function. The management?s interests are well aligned, with an attractive Esop across cadres. Esops constitute 7% of IIB?s total outstanding equity capital.
We expect CASA ratio to improve from 26.8% in 9MFY11 to 33% for FY13.
Improving liability franchise, structural improvement in RoA and 30% asset growth should help IIB to post one of the highest PAT CAGR (30%) among the banks under our coverage. We expect RoA to remain strong at 1.5% over FY11-13. We initiate coverage with a buy rating and a target price of Rs 330 (3x FY13E BV of Rs 110).