Buy rating on IndusInd Bank; Retail growth inching up again

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Updated: October 19, 2015 2:41:33 PM

Premium valuations to sustain due to growth potential and stable asset quality

induslnd bankAsset quality stable but risk taking continues to rise: Asset quality largely stable and the inch up in provisioning was related to higher standard asset provisioning on diamond portfolio. (Reuters)

Pickup in vehicle book growth key positive: Commercial vehicle (CV) book growth inched up to ~28% y-o-y, with ~30% growth in disbursements and retail book share is inching up again. This is the key positive, as the loan mix change should be favourable in FY16F as CV growth picks up and aids NIMs (net interest margins).

w Fees and liability momentum in line: (i) IndusInd Bank (IIB) has sustained an increased SA accretion momentum of R10-11 bn run-rate seen in Q1FY16 vs R6-8 bn run rate in FY14/15 (ii) Core fee income growth of 23.5% y-o-y was in line but all granular fee income streams like trade/FX/third party grew +20% y-o-y improving the granularity of core fees.

Asset quality stable but risk taking continues to rise: Asset quality largely stable and the inch up in provisioning was related to higher standard asset provisioning on diamond portfolio. In Q2FY16, RWA (risk-weighted assets) accretion again inched up with R100 bn of q-o-q increase vs R90 bn of balance sheet expansion and H1FY16 corporate growth was largely driven by CRE/ EPC/contractors indicating some inch up in risk taking again.


Maintain Buy: EPS of 23% CAGR over FY15-18F

We increase our FY16/17F PAT (profit after tax) by 1-2% and TP (target price) to Rs 1,050 (up 2.5%). Improving CV cycle should aid growth and profitability for IIB and hence we maintain our Buy rating. We prefer HDFCB (HDFCB IN, Buy)/Kotak (KMB IN, Buy) vs IIB due to better sustainability of all revenue streams.

Retail growth especially CVs inching up again:
* Overall loan growth adjusted for the diamond book migration of R41 bn from RBS was ~24% y-o-y driven by an uptick in the CV portfolio. Overall retail book grew by ~23% y-o-y matching overall loan growth after a long while.
* CV portfolio grew 27% y-o-y from 18% y-o-y in Q2FY16 and 10% y-o-y in FY15. Management indicated that momentum in MHCV book is building up and the trend is likely to continue.


Liability and NIMs performance stable
* IIB’s net interest margins inched up to 3.9% from 3.66% q-o-q largely due to the capital issue adjusted for which NIMs moderated marginally. This was largely a leverage impact. With improvement in loan mix going forward management seemed confident of improving NIMs from current levels.
* SA accretion of R10 bn was similar to the higher momentum of R11 bn SA accretion seen in Q1FY16 vs R6-7 bn of quarterly run-rate seen in FY14/15.

Asset quality stable
* Rs 730m of corporate slippages was from one new NPA account and two smaller restructured loans. Though gross NPAs inched up marginally slippages were broadly under check.
* IIB has an ARC security receipt book of Rs 2.3 bn up from Rs 2.1 bn in 1QFY16; IIB sold Rs 0.4bn of assets to ARCs in this quarter but IIB recovered Rs 0.2 bn as well.

Higher risk taking:

A negative in Q2FY16
* IIB’s RWA accretion of R100 bn was significantly higher than loan book accretion of R60 bn and B/S accretion of Rs 90 bn.
* RWA growth inched up significantly due to substantial increase in non-fund exposure. Management explained the non-fund exposure is largely to PSU enterprises but given that risk weight for PSUs is lower, this could not have contributed to such a large increase in risk-weight indicating some risk build-up.

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