IndusInd Bank - Post balance sheet realignment will eye scalability - ICICI Securities

IndusInd Bank's (IIB) Q2FY21 earnings vindicated its focus on balance sheet realignment - shoring up capital and deposit base, prudent provisioning, reducing corporate exposure, driving mix towards secured consumer loans and building granularity. With in-line core operating performance, earnings drew support from higher non-interest income to beat our expectations. As indicated, credit costs were elevated (~390bps) due to further Covid-19 provisions of Rs9.5bn (taking the cumulative buffer to >1% of advances). IIB's unique positioning in segments like CV, MFI and gems & jewellery will help it defy challenges appropriately. More so, up fronting stress in FY21 should lead to relatively lower credit cost in FY22. Maintain ADD with target price of Rs686.

- Collection efficiency at 95%; estimates low single digit restructuring: September (post moratorium) collection efficiency, at bank level, was encouraging at 94.7% improving to 95.5-96.0% by October and expected to inch up further by December. Vehicle finance collection efficiency was 94% - with tractors, two-wheelers and SCVs trailing below the averages. MFI business collection efficiency improved to 93% in October (91% in September). Corporate segment collection efficiency stood at 100% in September. Application for restructuring is minimal (5bps as of now) and estimates potential restructuring in low single digit (possible in luxury buses, hotels & educational institutions). There is stress emerging in a couple of real estate projects worth Rs5bn exposure; well collaterised but bank might look for restructuring

- Prudent provisioning continues keeping credit cost elevated: Pro forma GNPLs (including standstill overdues) at 2.32%, corporate SMA-1/2 at 23/10 bps and collection efficiency at 95% lend comfort on incremental stress. Deductions exceeded slippages led by write-offs of a fraud account, upgrades in vehicle financing & recoveries in three corporate accounts. However, bank followed a conservative stance of creating buffer and made excess provision on unsecured, MFI, vehicle financing (overall credit cost of >390bps). With this cumulative contingency buffer was shored up to >1% of advances and specific provisioning to 77%. Evaluating the portfolio profile, we are building in slippages of 4.5%/2.9% and credit cost of 3.6%/2.5% over FY21E/FY22E, respectively.

- Growth looking up for H2FY21; focus on secured, granular assets: Accelerated deposit traction, surplus liquidity and tier-1 capital at 14.8% (post capital raise) makes it well equipped to eye growth. Leveraging its niche, would look up for growth opportunities in vehicle financing (CV with a lag), microfinance, secured and better rated corporates. We estimate credit growth of 6%/15% for FY21/FY22E, respectively.

- Fee income - more granular, distribution led: With uptick in activity levels, fee income retracted 56% QoQ (albeit down 28% YoY). Robust traction in bancassurance, general banking fees was encouraging. Investment banking fees remained subdued offset by decent MTM gains on treasury book. Fee income was led primarily by granular retail streams and corporate fee would be contained sub-25%.

- NIMs witnessed downward pressure; to be rangebound: NIMs came off 12 bps to 4.16% - dragged down by lower investment yields, moderation in CD ratio and relatively higher FD rates. With utilisation of excess liquidity and flexibility to reduce deposit rates (in Q3FY21), it expects NIMs to be in 4.1-4.3% range.

Shares of INDUSIND BANK LTD. was last trading in BSE at Rs.585.6 as compared to the previous close of Rs. 588.7. The total number of shares traded during the day was 745533 in over 18388 trades.

The stock hit an intraday high of Rs. 601.95 and intraday low of 576.55. The net turnover during the day was Rs. 439499330.

Source : Equity Bulls

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