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Maintain REDUCE on IndusInd Bank - Strategic priorities to prolong RoE normalisation - HDFC Securities

Posted On: 2021-02-04 07:25:18 (Time Zone: Arizona, USA)

Mr. Krishnan ASV, Institutional Research, HDFC Securities

IIB witnessed better-than-expected P&L outcomes, largely on the back of stronger-than-expected NIMs and high PSL income. At 1.8% of loans, IIB reported one of the highest ratios of (potentially) restructured loans amongst its peers, which we believe will prolong the materialisation of stress. Further, the CCB* portfolio contributed disproportionately towards aggregate stress at ~40% of potential restructuring and pro forma slippages, indicating that the portfolio is yet to stabilise completely. With both sides of the balance sheet being re-engineered, we expect ROE normalisation to take longer and maintain our REDUCE stance with a target price of INR 749.

CCB* portfolio yet to stabilise: Even after haemorrhaging for most of FY20, IIB's CCB portfolio contributed to ~40% of potential restructuring (total at ~1.8% of loans - highest amongst peers) and pro forma slippages (total at ~INR 25.1bn, ~1.2% of loans). The share of corporate loans in potential stress is relatively higher than that of peers. This pool could disproportionately contribute to slippages beyond FY21E. We remain circumspect of the bank's asset quality prospects and build slippages of 3.8% over FY21-23E.

In-line provisions: Non-tax provisions were elevated in line with estimates at ~INR 18.5bn (3.6% annualised). On a pro forma basis, coverage was sequentially flat at ~77%. In addition, IIB held COVID-19 provisions of ~INR 9.7bn (0.4% of loans). We expect credit costs to gradually moderate here on and accordingly build LLPs of 3.1% during FY21E and 1.6% over FY22-23E.

CFD disbursements normalising: Retail disbursements, especially in the vehicle finance and micro-credit portfolios, are nearing pre-COVID levels, as collection efficiencies gradually improve in the CFD book (VF: 97% and MFI: 94%). The CFD segment accounted for 85% of pro forma slippages and 45% of the restructuring proposals, largely stemming from the unsecured pools of assets (including micro-credit), which we consider par for the course.

Shares of INDUSIND BANK LTD. was last trading in BSE at Rs.1031.95 as compared to the previous close of Rs. 1049.55. The total number of shares traded during the day was 626145 in over 17176 trades.

The stock hit an intraday high of Rs. 1041.75 and intraday low of 1016.2. The net turnover during the day was Rs. 643130500.

Source: Equity Bulls

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