INDUSIND BANK - Q2FY21 Result Update - YES Securities

Substantial profitability recovery likely from FY22 - Retain ADD

September-October collection efficiency at 95-96% at bank-level, marginal SMA 1 & 2 exposure (30-35 bps) in wholesale book and expectations of low single digit restructuring provides a palatable dimension to the stress on the balance sheet. Importantly, reasonable additional provisioning buffer (1.1% of Net Adv.) and a high PCR on NPLs tempers near-term credit cost expectations even as the bank adopts a more cautious provisioning policy. A calibrated resumption of growth largely premised on consumer book (Vehicle Finance, MFI and Secured Retail) and impending deposit rate cuts would uplift NIM over the next 3-4 quarters.

Even as we maintain our credit cost estimates, earnings get upgraded on better NIM, core fee and cost assumptions. As credit cost in highly cyclical businesses of Vehicle Financing and MFI will normalize in FY22, the bank's RoA could improve to 1.5-1.6% and RoE may reach 14% on the expanded equity base. Post the recent capital raise of Rs33bn, the CET-1 ratio strengthens to 15%. We retain ADD rating and have a 12m PT of Rs710.

Management Commentary

Asset Quality

- September collections efficiency at bank-level was 95% (October at 96%) - collections expected to inch-up further by December.

- Low single digit restructuring likely based on assessment - this time restructuring will have better outcomes.

- Enquiry for restructuring has been minimal so far - bank to use this resolution sparingly and make more than 10% provisions - segments like Hotels, Education Institutes, Luxury Buses and Real Estate are restructuring candidates.

- Corporate SMA-1 at 23 bps of loan book and SMA-2 at 10 bps.

Stance on provisioning

- Bank will make another round of additional provisions.
- It wants to be very conservative getting into next year due to Covid uncertainty.
- Want to flatten the provisioning curve for businesses like VF and MFI.
- Intend to maintain high PCR.

Loan growth

- Bank now ready for asset growth - VF, MFI, Secured Retail and Mid-corporate book to be growth drivers.
- ECLGS amount disbursed so far is Rs16bn.

NIM outlook

- NIM decline of Q2 will normalize over coming quarters.
- Surplus liquidity of ~Rs400bn (10bps NIM impact in Q2) will get deployed for growth.
- Will be initiating deposit rate cuts in Q3 - the gap with large private banks on retail TD rates will be reduced.
- NIM will start improving from Q4 - long term range 4.15-4.25%.
- Share of Top 20 depositors lower as compared to March 2020.

Vehicle Finance

- September collection efficiency was 94%.
- Freight availability will be better in Q3.
- Improved market share in almost all products.

MFI

- September collection efficiency was 91% - October at 93% - will cross 95% soon.
- Only 0.8% of portfolio has not paid since May.
- Collection efficiency at 99.9% on recent disbursements
- MFI book declined 5% qoq due to cautious stance on disbursements (were at 85% of last Sept).

Other retail assets

- September collection efficiency was 90%.
- Collection efficiency higher at 95% in BB and LAP products and was lower in unsecured products.
- Will keep unsecured loans at <5% of book.

Large Corporate

- Prepayments of Rs19bn led to portfolio decline.
- Collection Efficiency at 100% for September.
- Stress on two Real Estate projects where exposure is 500cr - these are well-collateralized and the bank will look at restructuring or other resolution.

Mid and Small Corporates

- Collection Efficiency at 95% for September.
- Pristine asset quality sustained in Gems & Jewelry portfolio.

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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