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MOSL : INDUSIND BANK: RoA expansion on track; asset quality improves further

INDUSIND BANK: RoA expansion on track; asset quality improves further

(IIB IN, Mkt Cap USD11.4b, CMP INR1218, TP INR1450, 19% Upside, Buy)

• IndusInd Bank (IIB) reported a PAT of INR18.1b (+57% YoY; in line) with steady operating performance across all key metrics during the quarter.
• Loan growth remained steady at 18% YoY with traction in Corporate as well as Consumer Finance book. Sequential growth of 6.4% in corporate was driven by working capital loans. Within consumer, growth was broad based barring micro-finance (MFI). However, growth in MFI book should also pick up as disruption due to regulatory changes has been fully addressed.
• Fresh slippages moderated significantly to INR15.7b (2.6% annualized) led by corporate and consumer segments. GNPA/NNPA ratio improved  by 24bp/ 6bp QoQ to 2.11%/0.61%, respectively. Restructured book declined to 1.5% in 2QFY23 v/s 2.1% in 1QFY23.
• We estimate PAT to report 40% CAGR over FY22-24, leading to 16% RoE in FY24E. Maintain BUY with a TP of INR1,450 (premised on 1.8x FY24E ABV).

Margin improves 3bp QoQ to 4.24% driven by corporate portfolio

• IIB reported 2QFY23 PAT of INR18.1b (+57% YoY; in line) aided by strong operating performance. For 1HFY23, PAT stood at INR34.4b, up 59% YoY.
• NII rose 18% YoY to INR43.0b (in line) while other income grew 9% YoY as the bank reported modest treasury gains of INR1.4b, (-58% YoY). Core fee income grew strongly at 24% YoY. NIM improved marginally by 3bp QoQ to 4.24% driven by 40bp rise in corporate lending yields. In 1HFY23, NII grew 17% YoY to INR84.6b
• Operating expenses increased 22% YoY to INR27.7b (in line) due to annual increments and fresh hiring. C/I ratio increased to 43.9% from 43.4% in 1QFY23. PPoP grew 10% YoY in 2QFY23 to INR35.4b while Core PPoP saw a higher growth of 18% YoY. In 1HFY23, PPoP grew 10% YoY to INR69.7b.
• On the business front, loans grew 4.9% QoQ (+17.8% YoY), led by Consumer Finance (+3.6% QoQ) and Corporate book (+6.4% QoQ). In the Consumer business, growth picked up in the Vehicle segment with disbursements of more than INR100b in 2QFY23. The Utility vehicle registered healthy momentum at 10% QoQ while Credit Card book grew 9.6% QoQ. Retail to Wholesale mix stood at 53:47. Deposit growth stood at 15% YoY with CASA mix at 42.4% and Retail deposit mix at 41% as per LCR.
• Fresh slippages moderated to INR15.7b in 2QFY23 from INR22.5b in 1Q, led by lower slippages in corporate as well as consumer segments. GNPA/NNPA ratio increased marginally by 24bp/6bp QoQ to 2.11%/0.61%. PCR ratio stood stable at ~72%. The bank held contingent provisions of INR26.5b (1.0% of loans). Restructured book moderated to 1.5% v/s 2.1% in 1QFY23.

Highlights from the management commentary

• IIB is confident of achieving the Planning Cycle 5 loan growth led by strong momentum in all categories and end FY23 with a loan growth of 20%.
• Vehicle finance saw the highest ever disbursement and has had one of the best runs in last several years.
• Growth in MFI segment should pick up henceforth as disruption due to regulatory changes is fully addressed.
• The bank maintains its guidance of credit cost in the range of 120-150bp and C/I ratio to remain ~40-43%.