IndusInd Bank
Rating: Add
Trends unchanged: Q3 FY15 marked a strong quarter with earnings growth of 29% year-on-year led by healthy revenue growth and lower provisions. Loan growth of 22% y-o-y was led by the corporate segment. IndusInd Bank (IIB) is well-placed compared to peers, as (i) macro recovery, lower crude prices and softening of interest rates should result in better retail loan growth and upsides to NIM (net interest margin) and (ii) strong execution is leading to a diversified balance sheet, better revenue mix and improvement in CASA (current account savings account). Maintain Add; TP (target price) at R870 (from R830 earlier).
A stable performance overall: IIB delivered a stable performance with an impressive earnings growth of 29% y-o-y on the back of 22% y-o-y revenue growth and 22% decline in provisions due to reversal of interest rates. Revenue growth was led by strong growth in non-interest income at 27% y-o-y, primarily due to higher contribution from treasury (13% of PBT). NIM was stable quarter-on-quarter at 3.7% while the bank grew its loans by 22% y-o-y. Retail loans grew 10% and non-retail loans 32% y-o-y. Impairment ratios were stable at gross NPLs (non- performing loans) of 1.1% and restructured loans of 0.6% of loans.
Well-placed among peers: IIB is well-placed among peers in the current environment. We expect NII (net interest income) growth to lead revenue growth over the next few quarters, led by (i) fall in funding costs, specially on wholesale deposits, and (ii) change in loan mix towards high-yielding retail assets.
Strong outperformance unlikely: At 3.4x book and 20x September 2016e EPS (earnings per share), IIB is one of the most expensive bank stocks.
While we don’t see huge upsides from current levels, we see the bank as a strong earnings compounding idea. Valuations give little headroom for expansion from current levels. The bank has consumed capital very aggressively in this cycle with tier-1 ratio at 11.5% but it represents the change in business mix and higher allocation of capital to non-fund-based business, which may imply the bank could look at dilution over the next few quarters. The stock is pricing in a strong recovery in business and assigning a high probability of success on its recent initiatives. Our positive view is driven by the superior execution, strong return ratios and scalability of the business given the size of the bank and opportunity in the market.
Margins stable q-o-q: NIM was stable q-o-q at 3.7% (up 4 bps) but the cost of deposits is showing some signs of moderation with it declining 20 bps q-o-q. However, we still don’t think this fully reflects the recent changes in deposit rates and we expect more reduction coming in the next few quarters.
Lending yields also showed a similar decline but it can be attributed to (i) negative mix in the loan portfolio with a higher share of lending in the corporate segment and (ii) decline in lending yields in the corporate portfolio of ~30 bps. The management highlighted that some portion of this decline can be attributed to a higher share of low-yielding foreign currency lending disbursed this quarter.
We retain our positive outlook on NIM as we believe that any pick-up in retail loans, especially in the vehicle portfolio, would give a significant boost for expansion as the yield differential between retail and corporate loans is >450 bps. We note that the share of retail loans has fallen to its lowest level at <45% as of Q2FY15.
Also, we believe that NIM expansion has higher potential for improvement from the re-pricing of liabilities downwards. The management has taken two initiatives that we are positive about: (i) cut in savings deposit rates for balances of less than R100,000 and increasing share of CASA to overall deposits and (ii) decline in wholesale rates that we have started to see in recent months.
Vehicle loans improving: Overall loan growth remained strong at 22% y-o-y led by 32% y-o-y growth in corporate loans and non-vehicle retail loans (70% y-o-y on a low base). Vehicle loan growth, which declined to its slowest pace in the previous quarter, grew 2% y-o-y. Loans to CVs (commercial vehicles) have moved to the positive zone with 1% y-o-y growth largely led by a healthy growth in disbursements (17% y-o-y).
Given the recent pick-up in heavy commercial vehicles, we expect the trends on disbursements to remain strong for the medium term.
—Kotak Institutional Equities