IndusInd Bank - Stress accretion on anticipated lines; medium-term strategy focused on scale with sustainability - ICICI Securities

IndusInd Bank's (IIB) Q3FY21 earnings vindicated its focus on prudent provisioning, ramping up of a granular deposit base, reducing corporate exposure, and driving core fee income. Proforma slippages at Rs25bn (cumulative 9MFY21 run rate at 3%), approved restructuring of 60bps (with additional invocation of 1.2%), and proforma GNPLs at 2.93%, were on anticipated lines. IIB continued building adequate buffer (credit cost at ~350bps for Q3FY21 / 4% for 9MFY21) against the stress pool, and is now carrying 3.3% cumulative provisioning. With improved visibility and gaining confidence from stability, the bank has articulated its 'Planning Cycle-5' strategy to: 1) scale up domains of expertise (vehicle, MFI diamond financing), 2) invest in new growth engines, 3) adopt conservative practices, and 4) sustain granularity in businesses - to deliver >5% PPoP/loans and >1.5% RoAs. Maintain ADD with a target price of Rs975.

- Overall stress accretion on anticipated lines; unsecured retail caused higher slippages: The bank reported proforma slippages of Rs25.08bn, which falls in line with the anticipated annualised run-rate of 3% in 9MFY21. Unsecured retail caused higher than expected stress (30% of incremental slippages against 4% of the book). This was offset by incremental stress in other portfolios settling lower 1) MFI slippages at Rs4.7bn (2% of advances), 2) vehicle finance at Rs5bn (<1%), 3) secured retail at Rs3.2bn (1.6%), and 4) corporate at a mere Rs3.8bn. Besides, restructuring was invoked on 1.8% of the loans: 1) vehicle loans constituted 30%, 2) non-vehicle retail at 13%, and 3) balance from corporate banking (no restructuring was invoked in MFI segment). Of this invoked pool, IndusInd has already approved 0.6% of restructuring.

- Prudent provisioning continues: Lending comfort on incremental stress are: 1) proforma GNPLs at 2.93% (up from 2.32% in Q2FY21), 2) corporate SMA-2 at 39bps, 3) invoked restructuring of 1.8%, and 4) collection efficiency at 96.9% in vehicle finance (94.3% in September) and 95.5% in MFI (94.4%/87.2% in Q3FY21/Q2FY21). Bank followed a conservative stance of creating buffer (credit cost of >350bps) and made 100% provision on unsecured, MFI, thereby creating proforma PCR of 77%. It now carries specific LLP of 1.1%, Covid-related provisions of 1.6% and standard/general/other provisions of 0.6%. Evaluating the portfolio profile, we are building in slippages of 3.6%/2.7%/2.0% and credit cost of 3.6%/1.9%/1.4% over FY21E/FY22E/FY23E respectively.

- With balance sheet realignment, now the bank looks up to scalability: Given accelerated deposit traction, surplus liquidity and tier-1 capital at 14.3%, IndusInd is well equipped to eye growth. Granularising the corporate portfolio and gaining confidence about its stability from limited stress flow-through + anticipated resolutions (3-4 accounts in the near term), it will now look to grow the corporate portfolio. The focus will be on gems & jewelry, supply chain, logistics, working capital for MNCs, etc. Leveraging its niche, the bank would look up for growth opportunities in vehicle financing, MFI, and secured and better-rated corporates. We estimate credit growth of 4%/13%/17% for FY21E/FY22E/FY23E, respectively.

- Fee income is more granular and distribution-led: With uptick in activity levels, fee income retracted further by 31% QoQ (albeit down 8% YoY). Loan processing fee grew 42% QoQ. PSLC income of Rs590mn supported general banking fees - else general banking fees would have been flat to down YoY/QoQ. Distribution fee is gaining momentum while investment banking fee continues to be volatile.  NIMs stayed put despite interest reversal: Despite interest reversals on proforma slippages of Rs1.85bn, impacting NIMs by >20bps, it was down by merely 4bps to 4.12%. Moderation in the C/D ratio, relatively higher FD rates and 30bps decline in consumer financing yield (interest reversals) had offset the benefit of 24bps decline in cost of deposits. With utilisation of excess liquidity and flexibility to reduce deposit rates, bank expects NIMs to be in the 4.1-4.3% range.

- Robust QoQ traction in deposits continues: Over and above the 13% YTD growth in deposits in H1FY21, IndusInd further added another 5% to its deposit base in Q3FY21, sustaining YoY growth at 10.3% (even on high base). The bank has kept its peak FD rates elevated, which is paying off in terms of inflows. Retail and small business deposits as proportion of overall deposits was up >270 bps to 35.9% (from 33.1%/31.9% for Q2FY21/Q1FY21) and CASA ratio was up at 40.5%. It has resumed branch expansion and targets to add 500 branches over the next two years.

- Rolls out planning cycle-5 strategy: IndusInd has rolled out its FY20-FY23 strategy of building scale with sustainability topping up its domains of expertise, investing in new growth engines, fortifying liabilities, and leapfrogging into digital banking. Conservatism will be the undertone as reflected in C/D ratio being capped below 95%, unsecured retail assets to be contained below 5%, PCR upward of 65%, etc. 'Affluent and NRI' will be the focused segment for mobilising deposits (constituting >30% of incremental deposits). BFIL integration and doorstep banking will surge rural deposits. It will scale up its key domain areas that demonstrated higher risk-adjusted returns over cycles, namely vehicle finance, MFI, diamond financing, and new domains (affordable housing, SME, wealth management). The expected outcome of this strategy will be 15-18% asset growth, >5% operating profit as percentage of loans, RoAs upwards of 1.5%.

Shares of INDUSIND BANK LTD. was last trading in BSE at Rs.846.25 as compared to the previous close of Rs. 802.6. The total number of shares traded during the day was 640391 in over 16920 trades.

The stock hit an intraday high of Rs. 860.5 and intraday low of 816.7. The net turnover during the day was Rs. 538725800.

Source : Equity Bulls

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