IndusInd Bank's Q1FY19 results (Outperformer) - Strong, 29% growth in core PPOP

Q1FY19 result highlights

• PAT of Rs10.4bn grew 24% yoy and 9% qoq. Growth in unadjusted PAT and PPOP looks slower than in the prior quarters due to high treasury income last year in 1Q18. While low treasury in 1Q19 was partly offset by higher forex income, it was not enough to compensate. Adjusted for treasury and forex, growth in core PPOP was higher at 29% yoy in 1Q19 versus unadjusted growth of 20% and growth in PBT was higher at 44% (vs unadjusted growth of 22%)
• Strong loan growth, pick up in core fees and lower than expected opex were the key earnings drivers. NIMs declined marginally qoq. Asset quality improved with lower qoq slippage and decline in credit cost.
• Loan growth remained strong at 29% yoy and 4% qoq. Corporate loan growth was strong at 30% yoy / 3% qoq. Including loans sold down, corporate loan growth was higher at 36% yoy. Retail loan growth was also strong at 29% yoy / 4% qoq led by strong growth in vehicles and non-vehicle segments.
• NIM declined 5 bps qoq and 8bps yoy to 3.92%. NII grew 20% yoy and 6% qoq. While yield on assets rose by 30bps qoq, costs of funds rose faster by 35bps. Mgmt explained that yields have risen slower than cost because while MCLR has been hiked, repricing will happen with a lag because the average MCLR reset on corporate loans is 270 days.  Also, most retail loans are fixed-rate and do not reprice. Around 60% of corporate loans are linked to MCLR which amounts to ~40% of total loans. As these corporate loans reprice, NIMs could improve. CASA deposits grew 37% yoy and 3% qoq.
• Core fees grew 20% yoy and 8% qoq an improvement over 12% yoy in 4Q. Within core fees, third party fees grew strongly driven by bancassurance and increased distribution of HDFC home loans. Trade and remittances slowed as the bank is cautious in a rising rate environment. Trading gains declined sharply yoy but improved qoq. In addition to lower trading gains the bank had MTM provisions of Rs860M. Overall non-interest income grew 11% yoy and 8% qoq.
• Mgmt remains bullish on the outlook for vehicle loans, especially CVs. The strong growth phase in CVs would last at least for two years due to pent up demand and road construction activities. Also, IIB has disclosed a weighted average risk score (WAR) of its vehicle portfolios. This score is a lead indicator for credit cost two quarters ahead. WAR has moved down since Mar-18 indicating that credit cost for CVs would decline 2Q19 onwards. 
• Operating expenses remained low for a second quarter in succession growing 12% yoy and 5% qoq despite 200 new branches added yoy. The lower than expected growth in opex was due to productivity gains.

Valuation and view

We expect IIB 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. We increase TP to Rs2,250. The merger with Bharat Financial will be RoE and capital accretive.