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MOSL: INDUSIND BANK (Buy)-Stepping toward ‘Business As Usual’ amid persisting concerns

IndusInd Bank: Stepping toward ‘Business As Usual’ amid persisting concerns

(IIB IN, Mkt Cap USD13.3b, CMP INR1510, TP INR1830, 21% Upside, Buy)

 

• IIB reported merged PAT of INR14.3b (standalone: INR12.2b) for 1QFY20, largely led by lower provisions of INR4.3b (our estimate: INR8.1b). NII stood at INR28.4b (~3% miss; standalone: +14% YoY to INR24.2b), while the NIM improved to 4.05% from ~3.6% in 4QFY19.
• Total income improved to INR45.1b (in-line), led by healthy other income growth of 28% YoY (standalone: +23% YoY). Core fees rose 22% YoY, led by growth in loan fees and addition of PSLC income due to the BHAFIN merger.
• Opex stood at INR19.2b (3% miss), driving a 290bp QoQ improvement in the C/I ratio to 42.5%. On a standalone basis, opex was up 18% YoY to INR17.8b, while the C/I ratio stood at 44.3% (120bp QoQ improvement).
• Loan growth stood at 28% YoY (standalone: +26% YoY), led by robust growth across both the corporate and consumer portfolios. The share of retail loans in total book increased to 54%, as IIB classified its MFI and Business Banking portfolio under the Consumer Finance segment.
• GNPA/NNPA was up 6.4%/5.9% QoQ to INR42b/23.8b, with fresh slippages coming at INR7.25b. Thus, the GNPA ratio increased to 2.15% (+5bp), while the NNPA ratio rose to 1.23% (+2bp). PCR ratio held largely stable at 43% (+27bp QoQ). The bank's exposure toward stressed account stands at 1.67% of total loans (fund based + non-fund based) v/s 1.9% in FY19, while SMA-2 book stands at 17bp (v/s 34bp in 4Q). Restructured advances were at 8bp.
• Other highlights: (1) CASA ratio was at 43.1%. (2) Customer base increased to 21m. (3) Gross loan portfolio of BHAFIN grew 26% YoY to INR175b.

Valuation and view: Merger with BHAFIN has strengthened the earnings profile and further boosted the return ratios. However, we conservatively factor in higher credit cost of 100bp/80bp for FY20/21 due to our concerns on prevailing economic slowdown and elevated stress in select lending segments. The clarity on management succession is going to be critical though we nevertheless estimate FY20/21 RoA of 1.9%/2.1%, buoyed by merger with BHAFIN. We value the stock at INR1,830 based on 2.8x FY21E BV.