IndusInd Bank's Q4FY19 results (Outperformer) - One – off IL&FS provisioning leads to a miss, earnings to rebound in FY20

Q4FY19 result highlights

• IIB’s PAT of Rs9.9bn declined 310% qoq and 68% yoy and was substantially lower than our estimate of Rs6.8bn. While the bank was expected to make higher provisions for IL&FS, the interest reversal on IL&FS was much higher than expected and lead to an earnings miss.
• The entire IL&FS exposure has been classified as non-performing in 4Q. Total exposure to IL&FS is Rs30bn of which Rs20bn is to the holdco. The bank has provided 70% on the holdco and 25% on SPVs though it expects recovery of 90% from SPVs. The bank holds provisions of 16.5bn on IL&FS of which Rs11.2bn was made in 4Q. The bank has written off Rs10bn of IL&FS to get tax benefits and to reduce the impact on non-accrual of income from IL&FS in the coming quarters. Due to the write-off, total PCR fell to 43% from 48% qoq. Ex IL&FS PCR was 54%.
• Loan growth remained strong at 29% and 8% qoq. Corporate loan growth of 30% yoy / 8% qoq outpaced retail loan growth of 27% 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 growth accelerated to 29% yoy and 11% qoq. Savings deposits also picked up growing 9% qoq and 19% yoy driven by retail, not government deposits. CASA remained stable at 43.1% versus 43.6% qoq.
• NIM declined sharply to 3.59% versus 3.83% qoq due to reversal of two quarters of interest of Rs1.53bn on IL&FS. Ex IL&FS NIM was stable at 3.84%. NII grew 11% yoy and declined 2% qoq, the slowest since FY10, pulled down by interest reversal. Fees grew strongly by 27% yoy and 12% qoq.
• Slippages rose sharply from Rs8bn to Rs37bn due to Rs30bn of IL&FS. GNPAs doubled qoq to 2.1%.
• IIB’s exposure to around 8 accounts of stress groups (watch list) is 1.9% of total loans according to mgmt. The bank has consolidated security cover of 140% on these loans of which 58% is listed shares. The bank says RoC filing of charges for assessing banking exposures is sometimes misinterpreted and should not be a reference point (we disagree because our hit rate based on back checks has been fairly high including our data on IIB’s own exposure to IL&FS when it was not publicly disclosed  – will address this through a separate report). However, for now, our concern is that IL&FS alone was 1.6% of total loans, so the total additional stress at 1.9% when one account alone was 1.6% looks low given IIB’s strong growth in corporate loans in the last two years in a weak macro. In addition to the stress of 1.9% which is fully standard, the bank has a small SMA exposure of 0.6%.

Valuation and view

We believe IIB has done a commendable job in building a strong retail franchise, in growing inorganically and building a strong mgmt. team. The merger with BhaFin can further enhance IIB’s retail reach. However, we do 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 loan and earnings growth and lack of alternative investment options in banks. We roll over base, cut target multiple to 2.9x and retain TP at Rs1820.