IndusInd Bank's Q2FY20 results (Outperformer) - Slower growth, higherslippage

Q2FY20 result highlights

• IIB’s consolidated PAT of Rs13.9bn declined 3% qoq (like to like) and grew 50% yoy (consolidated over standalone). Higher loan loss provisions were offset by lower taxation.  Loan growth slowed down both standalone and consolidated.
• Consolidated loans grew 21% yoy while standalone loan growth slowed to 14% yoy (28% in 1Q20). Management explained that repayments were higher in 2Q adjusted for which standalone loan growth was in high teens against the unadjusted 14%. Growth in the MFI book was impacted by floods. Vehicle loans grew 21%, non-vehicle retail loans grew 18%, MFI grew 32% while corporate loans grew 7%. The sequential growth in loans was 2% compared to 8% for HDBK.
• Total deposits grew 23% yoy and 3% qoq. Growth in savings deposits moderated to 14% yoy / 0.8% qoq due to withdrawals on the last day, some of which have already flown back in 3Q. CASA declined to 41.5% from 43% qoq.  
• Slippage rose qoq to Rs11bn from 7bn driven by higher corporate and MFI slippage. Corporate slippage rose to 4.8bn from 1.8bn qoq. Of the total corporate slippage Rs1.4bn was technical. The technical slippage was driven by delays in renewing corporate loan facilities which were subsequently renewed and upgraded. GNPAs rose 4% qoq to 2.19%. The bank made accelerated provisions to increase the PCR to 49.6% from 43% qoq. Credit cost rose to 1.5% from 0.9% qoq as the bank made accelerated provisions of Rs3.6bn. Exposure to three stressed groups (Essel, ADAG and DHFL) declined qoq to 1.1% from 1.7%. Management expects this to reduce further to 0.8% by end October with repayment of 2.57bn from an NBFC belonging to one of the three groups. Exposure to Indiabulls Housing not included in the three groups has reduced to 0.27% against the previously disclosed 0.35%. Exposure to Indiabulls Real Estate at 0.45% is likely to come down to 0.2% in 3Q. The sub-investment grade book remained stable qoq at 3.1% while non-overlapping SMA2 stood at 0.38%. SMA2 including overlaps rose sharply from 0.17% to 0.58% but the base remains low.
• Consolidated NIM improved 5bps qoq to 4.1% driven by improvement in standalone margins. While standalone NIM improved qoq, it remains lower yoy. Management expects NIM to improve to 4.25% over the next several quarters as cost of funds decline and loan mix changes.  NII grew 32% yoy and 2% qoq while core fees grew 21% yoy. Core PPOP remained flat qoq and grew 24% yoy.
• CET-1 at 13.8% is amongst the highest for banks we cover.

Valuation and view

We believe IIB’s strong capital adequacy and its retail book are its key strengths while uncertainties on the corporate portfolio (45% of loans) remain high given a deteriorating corporate cycle.  We retain Overweight given IIB’s strong retail lending franchise and capital adequacy. However, we cut our TP and earnings as we build in slower growth and higher provisions. We cut our earnings by 15% for FY20E and 11% for FY21E. We cut our TP from 1750 to Rs1,350 as we cut earnings and our target PBV multiple from 2.8x to 2.2x to reflect higher corporate loan risks.