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Maintain REDUCE on IndusInd Bank - Reversion to steady state profitability elusive - HDFC Securities

Posted On: 2021-07-28 17:23:14 (Time Zone: UTC)

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

IndusInd Bank's (IIB) Q1FY22 earnings were ~11% above our estimates due to higher non-interest income. Provisioning was elevated (annualised at 3.6% of loans), driven by a sharp spike in slippages at 5.4% (FY21: 4%) on account of the second wave. Impairments stemmed largely from the retail loan book (8% slippages) with stress seen across the vehicle finance, MFI and unsecured portfolios. Deposit mobilisation continued to witness a strong momentum with 12% sequential growth in SA deposits driving CASA ratio to 42%. However, a prolonged consolidation of the loan book (2y CAGR at 4.4%) and continued elevated stress (credit costs at >3% for six straight quarters) reflect a franchise that is yet to stabilise its asset side of the balance sheet. Maintain REDUCE with a target price of INR 734.

In-line operating performance: IIB reported NII/PPOP growth of 7.7%/9.4% YoY, broadly in line with our expectations. Despite a muted quarter in terms of business activity, the non-interest income was sequentially flat, led by higher treasury gains. NIMs declined sequentially by 7bps due to higher negative carry and interest reversals. Deposit growth continued to surprise positively, led by SA balances, bringing the cost of deposits to an all-time low of sub-5%. C/I ratio improved to 41.4% (Q4FY21: 42.4%), aided by trading gains.

Elevated slippages from the retail portfolio: Having re-jigged its corporate book towards more granular loans and having witnessed elevated slippages during FY20-FY21 in this portfolio, IIB's retail portfolio witnessed significant impairment in the quarter, with gross slippages at 8% and restructured portfolio at ~3.3%. This was largely on account of the second wave, which impacted collection, recoveries and business momentum. While the trend is similar across other lenders, IIB's disproportionate exposure to commercial vehicles and MFI (41%) is likely to keep credit costs elevated. Despite contingent provisions at 1% of loans and PCR at 72% offering comfortable cushion, the retail asset mix (and the telecom account exposure) remains vulnerable in the event of further economic or adverse regulatory shocks.

Consolidating loan book a concern; maintain REDUCE: The rising wedge between deposit growth (+27% YoY) and loan growth (+6% YoY) is a drag on margins and earnings growth. A high proportion of cash and equivalents (now at one-fifth of total assets) reflect a bank still searching for stability on the asset side of the balance sheet. Management's aspirations of ~16-18% loan growth over the medium term are contingent on IIB quickly stabilising its asset side of the balance sheet and confidently deploying the surplus liquidity. Maintain REDUCE with a target price of INR 734.

Shares of INDUSIND BANK LTD. was last trading in BSE at Rs. 992.3 as compared to the previous close of Rs. 975.65. The total number of shares traded during the day was 568461 in over 8992 trades.

The stock hit an intraday high of Rs. 1008.8 and intraday low of 979. The net turnover during the day was Rs. 565603850.

Source: Equity Bulls

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