IndusInd Bank's Q1FY20 results (Outperformer) - PPOP growth below average but will revive with higher NIMs starting 2Q

Q1FY20 result highlights

• IIB’s consolidated PAT of Rs14bn grew 38% yoy and 298% qoq and was higher than the consensus estimate of 12.8bn. Standalone PAT of Rs12bn grew 18% yoy and 239% qoq, driven by a sharp decline in provisions. Standalone PPOP growth at 17% yoy was similar to 4Q and below the long term average of 21% due to lower NII. Slower NII growth was partly offset by higher trading gains while fee growth was in line at 22% yoy. Credit cost fell sharply qoq as 4Q19 contained lumpy IL&FS provisions, but remained stable yoy.
• Excluding sell-down of corporate loans of Rs75bn (Rs57bn qoq and 50bn yoy), sequential loan growth was weak at 1.9% for standalone IIB. Including loans sold, growth was higher at 3.9% qoq and 27% yoy for standalone IIB. There was no sequential loan growth at BhaFin due to caution on MFI loans in Orissa and other states where BhaFin tightened lending norms to Rs60,000 / 2 lenders from Rs80,000 / 3 lenders.  Consolidated loans grew 28% yoy and 4% qoq. Consumer loans (ex MFI and business banking) continue to grow strongly at 23% yoy and 3% qoq. despite OEM slowdown as the bank continues to acquire market share in vehicle loans. Corporate loans including MFI and business banking grew 31% yoy and 5% qoq.
• Total deposits grew 26% yoy and 3% qoq. While CASA deposits grew 25% yoy and 3% qoq, retail term deposits grew 42% yoy. Around 10% of BhaFin’s customer base of 7.5M has opened savings accounts with IIB and the target is to open savings accounts for all BhaFin customers by year-end.
• Slippage moderated to Rs7bn from Rs37bn qoq as there were no lumpy slippages. The watch list reduced from 1.9% to 1.67%  qoq. In absolute terms the reduction was Rs3bn of which MTM for DHFL was Rs1.26bn (included in loan provisions) and recovery was Rs1.7bn.  The BB and below portfolio is 3% of total loans and ~6% of corporate loans. GNPAs rose 6% qoq to 2.15% of loans. The bank does not expect any further provisioning on IL&FS. Mgmt indicated that bids received for SPVs are good and would more than cover the entire debt of the projects including unsecured/subordinated.
• Standalone NIM improved qoq to 3.7% from 3.59% however it is lower than the yoy NIM of 3.9%. The yoy decline is due to income reversal and non-accrual of income on IL&FS (Rs20bn of IL&FS exposure is still part of assets which does not earn any interest). Consolidated NIM was 4.05%. Standalone NII grew 14% yoy and 8% qoq while consolidated NII grew 34%. NIMs will improve from 2Q due to 1) Full impact of the repricing of residual liabilities of BhaFin of Rs60bn 2) Incremental cost of deposits and borrowings has declined 30-40bps in 2Q compared to 1Q. While cost of funds is declining, yield on BhaFin’s fixed rate consumer loan portfolio will remain unchanged, boosting margins. 3) Equity funds infused by the promoters in 2Q of Rs7bn will add to NIMs.

Valuation and view:

We expect PPOP growth to improve from 2Q driven by better NIMs. We believe IIB has done a commendable job in building a strong retail franchise and growing inorganically. However, we remain cautious about stress in the corporate book given IIB’s strong corporate loan growth amidst rapid rating downgrades across sectors, and growing stress in the NBFC and real estate sectors.  We retain Overweight given strong earnings growth and lack of alternate investment options. However, we cut our TP from 1820 to Rs1750 as we cut our target PBV multiple from 2.9x to 2.8x to reflect higher corporate loan risks.