MOSL: INDUSIND BANK (Buy)-BHAFIN’s performance on track-earnings to accelerate post-merger

INDUSIND BANK: BHAFIN’s performance on track; earnings to accelerate post-merger; Expect RoA/RoE to recover to 2.2%/20.3% by FY20

(IIB IN, Mkt Cap USD17.5b, CMP INR1872, TP INR2150, 15% Upside, Buy)

• After successfully completing three planning cycles, IndusInd Bank (IIB) has now entered the fourth planning cycle (FY18-20). Besides delivering healthy profitability and gaining market share in the existing businesses, it intends to further develop its long-cherished livelihood financing theme in this cycle.
• IIB has already taken a first step toward this by announcing a merger with its business correspondent (BC) partner, Bharat Financial Inclusion (BHAFIN). It will be able to leverage BHAFIN’s rural network, and thus, provide last-mile financing to villages without incurring additional cost.
• We expect IIB to report healthy acceleration in earnings over FY18-20 (as the impending merger with BHAFIN gets concluded) and project RoA/RoE of 2.2%/20.3% in FY20. Our forecasts are premised on expectations of steady expansion in margins (FY20E: 4.7%), an improvement in the C/I ratio (by 190bp) and controlled credit cost.

We reiterate our Buy rating on IIB, with a target price of INR2,150 (3.3x FY20E ABV).

BHAFIN’s performance on track; demonetization impact waning

BHAFIN has orchestrated an impressive turnaround, led by strong performance across operating parameters. It delivered AUM/PAT growth of 38% /57% in FY18, while the GNPL/NNPL ratios declined to 2.4%/0.1% from 6%/2.7% in FY17. Cumulative collection efficiency for loans disbursed post 1st January 2017 stands at 99.8%, indicating normalization of on-the-ground operations. Margins have been largely stable, while a reduction in funding cost and an improvement in operating leverage (cost-income ratio is down to 50% from 74% in FY14) could provide a booster to earnings growth. BHAFIN has guided for AUM/earnings growth of 43%/36% in FY19.