FY20e PAT cut by 16% to factor in higher provisions; RoA is expected to recover in FY21; ‘Buy’ maintained with TP revised to Rs 1,796.
IndusInd Bank (IIB) continues to report a fairly divergent top half of its P&L vs bottom half with robust operating trends led by a strong retail franchise on both assets and liabilities. However, asset quality and credit costs continue to dog the bottomline. While the worst does seem to be behind it, the current weak credit environment can throw up further negative surprises. However, the end of chunky provisioning pertaining to known stressed accounts should likely help PAT and RoA to recover in FY21e. In fact, even in the current environment, the bank continues to report a superior 1.8% RoA despite 2% total provisioning costs. We maintain our Buy rating with a slightly lower target price of Rs 1,796, implying a 21% upside.
Q3 summary: 15% lower-than-estimated PAT, led by higher provisioning, was offset at the operating level with operating profits coming in ~6% above our estimates. Loan book grew by mere 13% y-o-y led by muted growth in large corporates. The bank has been witnessing improvement in margins over the past few quarters led by repricing of BHAFIN’s liabilities. Fee income declined 2% y-o-y on merged basis, led by lower foreign exchange and general banking fees. The headline GNPA number stood stable while slippages were higher at Rs 19.5 bn vs `11 bn in Q2FY20. Net slippages were contained at Rs 2.1 bn led by recoveries, sale to ARCs and write-offs.
Stressed list declined to 0.5% of loan book: Out of Rs 11 bn of corporate slippages, Rs 2.8 bn was HFC, Rs 2.5 bn was diversified group from stressed list and Rs 1.8 bn was from a travel company. Despite higher slippages, SMA 2 book stood at 0.53% (0.58% in Q2FY20). Stressed list declined to 0.47% from 1.1% in Q2FY20, led by recoveries, repayment and write-offs. The bank had classified one travel company and one diversified group as fraud account and has provided `2.4 bn in Q3FY20 while reserves are debited with remaining `Rs 7.2 bn. This will be debited over the next three quarters. The bank guided to 70-80bps of credit cost for FY21 excluding provisioning on IL&FS. Total PCR on IL&FS now stands at ~73% post accelerated provisioning of ~Rs 6.1 bn over past two quarters vs expectations of a 70%-plus recovery rate.
Earnings outlook: We cut our PAT estimate for FY20e by 16% factoring in higher provisions but maintain FY21/22e estimates with RoA estimated to reach 2.3% by then.
Valuations: IIB trades at 2.6x P/ABV and 13x P/E 1-year forward. The opportunity of a bounce-back in earnings growth and RoA is factored into our DDM-based target price of `1,796, implying a 21% upside and meriting a Buy rating on the stock.