IndusInd Bank's Q3FY19 results (Outperformer) - In line, but 4Q credit cost could be substantially higher

Q3FY19 result highlights

• PAT of Rs9.85bn grew 5% yoy and 7% qoq and was in line with our expectations. IIB’s operating performance was in line and strong with strong loan growth, stable margins and stronger than expected fee income (street was expecting decline in core fees while the bank has reported a sequential increase of 4%). PPOP grew 27% yoy and 6% qoq while core PPOP grew 23% yoy and 1% qoq
• The bank made provisions of Rs2.55 bn towards their IL&FS hold co exposure of Rs21bn. As of now IL&FS is standard for IIB but we believe it will slip in 4Q. Exposure to operating assets is Rs9bn of which exposure to the Chenani tunnel is Rs7.5bn. The bank has not made provisions towards the operating assets as these are performing well. Total provisions towards the IL&FS hold co.  stands at Rs5.8bn or 28% of the hold co exposure. Mgmt wants to make 40-50% provisions on the IL&FS hold co. exposure by 4Q.
• The bank’s divergence is low so they did not need to report it. Slippage rose sharply qoq from Rs4.2bn to Rs8.1bn due to higher corporate slippage which rose from Rs0.9bn to Rs4.6bn. Corporate slippage mainly came from 2 EPC and one other mid-sized account of under Rs1bn each. PCR has declined qoq from 56% to Rs48% due to higher write-offs (3.6bn in 3Q). GNPAs rose 10% qoq to 1.13%.
• Loan growth was exceptionally strong at 35% yoy and 6% qoq. Corporate loan growth of 39% yoy / 6% qoq outpaced retail loan growth of 28% yoy / 7% qoq. Within retail loans, there was a strong growth in CV financing, despite weak CV sales reported by CV manufacturers. The growth has been driven by market share gains from NBFCs. Deposits grew 20% yoy and 4% qoq. Savings deposits declined 2% qoq (up 18% yoy) due to repayment of government deposits which can come back. Growth in borrowings was strong at 91% yoy and 4% qoq.
• NIM remained stable qoq at 3.83% (but lower than 3.99% in 3Q18). NII grew 21% yoy and 4% qoq.
• Core fees grew 18% yoy and 4% qoq led by foreign exchange and loan processing. Investment banking fees grew 12% yoy and -6% qoq. Trading gains rose sharply to Rs.2bn from Rs1bn qoq. Overall non-interest income grew 24% yoy and 12% qoq. Opex grew 16% yoy and 7% qoq.

Valuation and view:

While 3q was in line, we see a steep increase in provisioning in 4Q. We are increasing our 4Q provisions to Rs11bn from Rs6bn in 3Q as we believe the haircut on the hold co would be 60%. Also while the operating assets are performing well, these will have to be classified as NPLs in 4Q due to the moratorium and 15% provisions will have to be made on these as well. These provisions can be written back when the assets are sold. We cut our earnings by 15.2% for FY19 and increase our earnings by 5.5% for FY20E. We cut our TP to Rs1820 as we cut our target multiple to 3.5x from 3.9x. We maintain OP after sharp correction since 2Q earnings and strong loan and fee growth.