The Q1 profit of IndusInd Bank at `1,600 crore rose 64% YoY and was ahead of our estimate with stronger fees and lower credit cost. The loan growth improved to 18% YoY and NIMs rose, but the lender needs to improve on share of retail deposits from 41%. Slippages were expectedly higher due to slips from restructured loans (2.1% of loans), but this should moderate from here. Turnaround is in play and improving ROA/growth to aid rerating — IndusInd is among top picks.
Slippages rise from restructured loans, but within expectations and buffers: The bank saw an 8% QoQ rise in slippages on the back of delinquencies from restructured loans (41% of slippages). Overall delinquency ratio was at 4.3% of past year loans (annualised) and 15% of restructured loans (as of March 2022) slipped during the quarter. This was in line with our expectations and could be absorbed partly within new provisions and draw-down from buffer provisions. As a result of slippages and no sale to ARCs, gross NPLs rose 8% QoQ to 2.4% of loans and the coverage ratio was stable at 72%. Restructured loans at 2.1% of loans are higher, but we expect slippages from restructured loans to moderate. Hence, the stress can be absorbed within buffer provisions at 1.2% of loans. This should help to drive moderation in credit cost from 3% in FY22 to 1.7-2% of average loans in FY23-24.
Growth trends improving; structural improvement in funding mix is key: Lending activity has picked up in the retail and corporate segments and MFI disbursements can pick up further from the second quarter onward. NIMs have expanded a bit to 4.2% and aided the NII growth of 16%. The management expects NIMs to be in a narrow range of 4.15-4.25% as cost inflation is offset by loan repricing.
Maintain ‘buy’: We lift earnings a bit as we factor better fees and believe that the lender is a good turnaround story with improvement in growth and ROA trends, aided by moderation in credit costs. We maintain IndusInd Bank among our top picks in financials with a ‘buy’ call. The price target is `1,250 based on 1.5x June-24E adjusted PB.
