Traction in net interest income

IndusInd bank has again delivered a strong performance led by traction in net interest income. The bank has consistently delivered across all metrics?evident from higher margins, expanding CASA (current account, savings account) base, robust credit growth, strong fee income and healthy asset quality.

Having successfully executed a marked improvement in operating performance, the management is now working to accelerate loan growth (35% CAGR over FY10-13E) and grow profitably. Driven by a sound business model and significantly underutilised franchise, we expect IndusInd to deliver impressive 43% earnings CAGR (compound annual growth rate) over FY10-13. Despite the recent run-up in the stock price, (99% outperformance vis-?-vis the Sensex over the past 12 months), we expect further upside driven primarily by RoA (return on assets) expansion (35 basis points over FY10-13) and strong asset growth. At 2.9x FY12E adjusted book, we reiterate Outperformer. IndusInd Bank remains a top midcap pick for us in the financials space.

Q2 results update: IndusInd Bank reported strong set of results with a PAT (profit after tax) of Rs 1.33bn?71% YoY and 12% QoQ growth in Q2FY11 vs our estimate of Rs 1.38 bn. The earnings growth was led by strong NII (net interest income) growth, traction in fee income, robust loan growth and continued expansion in CASA ratio.

NII came in at Rs 3.3 bn, a strong 58% YoY (year-on-year) and 12% QoQ (quarter-on-quarter) growth ?ahead of our estimate of Rs 3.1bn. The traction was led by a sequential increase in margins and robust loan growth.

Reported NIMs (net interest margins) improved by 9 bp QoQ to 3.41%, buoyed by stable costs of deposits and a rise in yield on investments. Costs of deposits stayed at 5.99%, as re-pricing of term deposits at higher rates was balanced by a rising proportion of CASA deposits. The yield on investments rose 26 bp QoQ to 6.16% from 5.90% in Q1FY11.

CASA deposits grew by a strong 65% YoY to Rs 80 bn aided by a robust 21% QoQ and 73% YoY growth in current deposits (aided by a strong IPO flow in Q2FY11). Savings deposits grew by 48% YoY and 15% QoQ to Rs23.6 bn. Consequently, the CASA ratio expanded by 114 bp QoQ to rise to 25.4% compared to 24.3% in Q1FY11 and 21.2% in Q2FY10.

Advances grew by a strong 9% QoQ and 33% YoY to Rs 234 bn. The growth in advances was broad-based as both consumer finance and corporate loans grew by robust 9.1% and 8.2% QoQ growth, respectively. Within consumer finance auto loans (CV up 11% QoQ, 3W up 11% QoQ and UVs up 8% QoQ) continued to gain traction. On the liability side, deposits grew faster at 37% YoY, leading to a decline in CD (credit-deposit) ratio to 75% from 79% in Q1FY11.

IndusInd?s core fee income exhibited a growth of 32% YoY to Rs 1.6 bn led by traction in transaction banking fees (57% YoY) and investment banking fees (up 2.7x YoY to Rs 190 m). Total other income rose 9% QoQ and 32% YoY to Rs 1.75 bn.

Gross NPAs declined to 1.21% in Q2FY11 (increase of Rs 112 m in absolute terms) compared to 1.26% in Q1FY11 and 1.50% in Q2FY10. Gross slippages for Q2FY11 stood comfortable at Rs 750 m (1.4% of advances?annualised). Owing to higher provisions, net NPAs declined to 0.36% in Q2FY11 from 0.38% in Q1FY11.