Accumulate IndusInd Bank Ltd For Target Rs.1,827.00 - Emkay
* IndusInd Bank’s (IIB) Q3FY18 net profit is in line with our estimate, with marginal misses in NII and other income being compensated by lower provisions. The bank reported stable 4% NIM while lower trading income and flat investment banking fees kept other income unchanged qoq.
* Balance sheet momentum was robust with loan growth at 25% yoy. Retail loan proportion rose marginally to 41% while CASA deposits touched 42.9%, up 60bps qoq.
* Slippages declined 18% qoq to Rs4.1bn but lower recoveries pushed up the GNPA ratio by 8bps qoq to 1.16%. PCR improved by 37bps qoq to 60.5%. The RBI review report is awaited.
* We recently initiated coverage on IIB with a TP of Rs1,827, valuing it at 4x FY19E ABV. We retain our estimates and TP.
* Leveraging CASA advantage to drive high quality credit: IIB’s incremental push to drive exposures in top-rated corporates has effectively resulted in keeping the blended risk weights stable. The bank’s loan book expanded by 25% yoy while the RWAs expanded by 21% yoy. Despite the fine pricing in large corporate segment, IIB’s improving cost advantage helped it to maintain NIMs at a stable level of at 4% (decline in cost and yield on funds matching at~24bps yoy).
* Share of retail loans rises marginally: Though the retail loan growth was strong at 24% yoy, corporate loans continued to dominate the incremental loan mix, restricting the share of retail loans at 41%, an improvement of 120bps qoq. The IIB management continued to guide for an improvement in the share of retail loans to 50% of overall loan book without an indicative timeframe to achieve the same.
* Core fee momentum steady: IIB’s trading income declined by 37% qoq to Rs1.1bn, causing the overall other income to stay flat qoq at Rs11.87bn. However, the fee growth remained healthy (~22% yoy) and was in line with the overall balance sheet momentum (refer Exhibit 6). We expect a stronger momentum in fee income in Q4FY18, typically the strongest quarter for fees every year.
* GNPAs increase but PCR improves: Despite a decline in slippages by 18% qoq (Rs4.1bn), lower recoveries caused the GNPA ratio to increase by 8bps qoq to 1.16%. The slippage trends saw a reversal in Q3FY18, with corporate slippages declining by a sharp 50% qoq and slippages in the consumer book increasing by 25% qoq. The PCR improved by 37bps qoq to 60.5%, restricting the increase in NNPAs at only a marginal 2bps qoq to 0.46%. IIB is yet to receive the RBI report on asset quality review. Though the bank did not report any meaningful divergence in previous review, the pending report on the latest review shall continue to remain an overhang on asset quality expectations for IIB.
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