* Operational performance continues to be robust:
IndusInd Bank (IIB) has posted mixed results for Q4FY2017. While on the one hand, the bank has registered strong operational performance in terms of growth in Net Interest Income (NII) and Pre-Provisioning Operating Profit (PPOP), on the other hand, higher provisions led to a muted growth in Net Profit. IIB posted strong NII for the quarter at Rs1,667.45 crore, a robust growth of 31% YoY (5.6% QoQ), helped by robust business growth and healthy margins. Net Interest Margin (NIM) at 4.00% (3.94% in Q4FY2016) continues to be best-in-class. Business traction too continued to be healthy, with Deposits at Rs1,26,572 crore (up 36% YoY) and Advances at Rs1,13,081 crore (up 28% YoY), which remarkably was ~5x the system credit growth.
* Healthy fee income and Retail business growth indicate inherent earnings quality:
IIB’s Non-Interest Income for Q4FY2017 came in at Rs1,211.30 crore, posting a strong 33% YoY growth on the back of healthy core fee income growth of 29% YoY. Fee Income accounts for 82% of the total other income, which indicates a strong and sustainable income stream. Consequently, the Operating Profit stood at Rs1,572.23 crore, showing a robust growth of 37% YoY. The Retail business continues to expand at a fast clip, with IIB’s CASA ratio sustaining at 36.9% from 37% in Q3FY2017 despite demonetisation led deposit surge not there in Q4.
* Asset quality worries creep up:
IIB has been consistently able to maintain impressive asset quality performance, but Q4FY2017 saw a two-fold rise in provision. The bank made a one-off provision of Rs122.00 crore against a large corporate account classified as ‘Standard Advance’ pursuant to the Reserve Bank of India’s specific advice in this regard. The bank’s exposure to this account, which is due for repayment in June 2017, pertains to a bridge loan extended for a Merger & Acquisition transaction in the cement industry. Still, IIB was able to meet its credit cost guidance of <60BPS for FY2017 and the GNPA and NNPA remained largely stable at 0.93% and 0.39%, respectively on a sequential basis.
* Valuation and outlook – strong operational performance re-assuring despite spike in provisions:
Over the past few years, IIB has maintained its high growth momentum without compromising on its strong asset quality. We expect the bank’s growth momentum to continue while its Cost-to-Income ratio should trend down as has been outlined by the management in its next phase strategy roadmap. IIB currently trades at 3.6x FY2018E Price-to-Book Value (P/BV), which we feel is reasonable for a bank in a high growth phase, with high ROE and excellent asset quality. While several of IIB’s peers have struggled with high delinquen¬cies in the past few quarters, it has been resilient by posting a continuously improving performance. We change our stance from “Netural” to “Positive” and foresee a potential 15-18% upside from the current level.
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