IndusInd Bank's Q4FY18 results (Outperformer) - Strong earnings, divergence not material

Q4FY18 result highlights

• PAT of Rs9.5bn grew 27% yoy and 2% qoq, in line with consensus. The bank reported divergence of Rs13.5bn which at 1.2% of loans is not material. As a large part of the divergence had to be dealt with in 4Q, slippages for 4Q rose sharply qoq but still remain significantly lower than the sector’s. Strong earnings growth was driven by strong loan growth, stable NIMs and a modest growth in operating expenses. While NII was strong, fee growth moderated. Strong growth in CASA continued.
• Loan growth remained strong at 28% yoy and 12% qoq. Corporate loan growth was strong at 30% yoy and 16% qoq. Retail loan growth remained strong at 26% yoy and 8% qoq. The proportion of AA and AAA corporate loans improved to 36% from 30% yoy. IIB focussed on taking share of top rated PSU loans from state banks including a loan to a top rated power company (not in thermal power). Around Rs40bn of corporate loans including refinancing of NCLT cases happened at the end of the quarter, the positive impact of which will be seen in NII in 1QFY19. As for retail loans, CV loans grew24% yoy and 9% qoq, tractor loans at 50% yoy while other loans grew 26% yoy and 6% qoq. The huge growth of 61% yoy and 27% qoq in CV disbursals is noteworthy and was driven by replacement demand. NIM declined 3bps qoq to 3.97%. NII grew 20% yoy and 6% qoq, slower than loan growth because a large part of the corporate loan growth happened at the end of the quarter.
• Core fee growth and trading gains were both subdued. Core fee growth moderated to 12% yoy and 3% qoq due slower processing fees (processing fees are linked to renewals and can be lumpy), slower general banking fees and a very high base of distribution income in 4Q17 driven by demonetization. Trading gains fell sharply given the rise in yields during the quarter.
• There was a sharp increase of 110% in slippages qoq mainly driven by divergence. Retail slippage rose from Rs2.7bn to Rs3.2bn. Corporate slippage rose sharply to Rs5.4bn from Rs1.4bn qoq. Of the slippage of Rs5.4bn, Rs3bn was on account divergence including one road account which was on IIB’s divergence but is standard for all other banks, Rs0.5bn was Gitanjali and the rest was normal slippage. GNPAs rose 14% qoq but they remain low at 1.17% of loans. The gross impact of divergence on 4Q slippage is Rs3bn and the net impact is Rs1.9bn as one loan was sold to ARC. SMA2 loans are small at 0.13% - an indicator that asset quality is superior.
• Capital consumption was high in 4Q at 65bps as RWAs for operational risk are added in 4Q. Also market risks were higher due to certain non-SLR securities acquired by the bank.

Valuation and view

We expect IndusInd to outperform the sector given its strong retail lending franchise, strong capitalisation in a weak sector, low NPLs, low rate-risk and the Bharat Financial merger. Our TP for IIB is Rs2,100. The merger with Bharat Financial will be RoE and capital accretive.