Our current estimates factor 3%/2% of credit cost in FY21-22, a 20 bps lower credit cost will lift FY21 estimates by 21% (on low base) and FY22 estimates by 8%; or the bank may use this to improve coverage.
For Q1FY21, IndusInd Bank’s (IIB’s) profit of Rs4.6 billion was above estimates. Key positive was fall in moratorium loans from 52% to 15%- but if overdue and balance opt-out loans are included, it’s c.29%. Collections in MFI, CV and low moratorium in real estate and G&J are good. Lower credit costs can give upside to earnings. Improvement in deposit profile will be key to aid loan growth (2% year on year). Capital raise of Rs33 billion lifts net worth by 10% and may have strategic partnerships. The ‘buy’ rating stays.
Moratorium loans stabilising, improvement in MFI collections key. It is encouraging to note the decline in moratorium loans from c.52% of loans to 15% now (on reported terms). This may rise to 29% if overdue loans and MFI book of at least four-instalments are included. It’s encouraging to note that even as MFI segment is given moratorium on opt-out basis, about 75% of loans have serviced four or more instalments; exit collection rate is at 86%. We are also encouraged to see that only 10% of real estate loans and sub-10bps of gems & jewellery loans have sought moratoriums. These trends should abate concerns on extreme credit costs and if actual asset quality trends are better than our estimates, there could be upside to earnings estimates. Bank also has 60bps of loans in contingent provisions. Our current estimates factor 3%/2% of credit cost in FY21-22, a 20 bps lower credit cost will lift FY21 estimates by 21% (on low base) and FY22 estimates by 8%; or the bank may use this to improve coverage.
Deposit quality improvement holds the key. During Q1, deposits were up 5% yoy, but Casa was down 2% yoy. Management indicated that this reflects reduction in bulk deposits and some loss of high-ticket relationships, which is stabilising now. Improvement in deposit franchise, reduced concentration/granular deposits hold the key. As highlighted in our report, ‘Contrasting IIB’s Turnaround Potential with ICICI Bank’s Experience in FY09-11’, a combination of asset consolidation and aggressive push for Casa should help revert to growth from FY22 onwards.
Capital infusion brings cushion and has strategic partnerships. Bank has also approved raising of Rs 33 billion of capital through preferential issue of shares to new investors (Rs 25 billion) and promoters (Rs 8 billion) at Rs524 (broadly in line with CMP). This will not only beef-up capital base – FY21e net worth by 9% and Tier I CAR by +100bps – but we also note that bank has existing partnership with some investors that can be leveraged to drive fee-based businesses for the bank.
Maintain ‘buy’. We see suppressed earnings in FY21 due to weak topline and high provisioning, but better than expected asset quality can drive upsides for FY21-22. We add FY23 estimates and maintain our ‘buy’ call with target price of Rs 680 based on 1.3x Jun-22 adjusted PB.