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Asset quality slips but within tolerable levels; set to resume growth

* Despite lower margins, higher opex and elevated provisions, IIB reported an in-line PAT of Rs10.2bn (up 99% yoy), mainly due to healthy fee growth. GNPA formation (up 21bps qoq to 2.9%) was largely in line with larger peers, while restructuring was below management’s guidance (up 60bps qoq to 2.7%).

* As per management, the bulk of the retail/SME stress formation from the second Covid wave is behind, and normalization should start from H2. The bank carries a healthy Covid contingent provision of Rs20bn (incl. Rs12bn for restructuring)/1% of loans. Its specific provision stands at Rs1.5bn toward the risky telecom exposure (Vodafone: Rs34bn).

* Deposit growth (26% yoy) far outpaced credit growth (6% yoy), hurting margins in Q1. However, steady retailization of assets (55% vs. 52%)/liabilities (50% vs. 37%) and credit growth acceleration with a better grip on asset quality should drive NIMs up. This, coupled with moderating LLP, should increase RoA/RoE to 1.7-1.9%/15-16% over FY23-24E.

* We believe a resurgent IndusInd with a better liability profile, higher retail orientation, and risk-guards in place should deliver sustainably higher return ratios, providing a good turnaround story to play on. Retain Buy with a revised TP of Rs1,375 (2x Jun’23E ABV).

Growth should accelerate with a better grip on asset quality and improving underlying demand:

Overall credit growth remained subdued at 6% yoy, while deposit growth was far higher at 26%, hurting margins. According to management, the second Covid wave delayed the planned credit acceleration which otherwise was expected from Q1. That said, large corporate credit growth was healthy at 5% yoy in Q1 after continued de-bulking for a long period. IIB believes that underlying retail credit appetite remains strong, and thus it will look at accelerating growth, driven by both secured products (mortgages/VF) and unsecured PL/MFI. We believe better credit growth, some slowdown in deposits after recent rate cuts, and lower interest reversals will drive margins up in the near- medium term.

NPAs/restructuring inch up but remain within tolerable levels and well-covered:

Gross fresh slippages were higher at Rs27bn/5.6% of loans, mainly from retail (VF-38%/MFI-24%), leading to a 21bps qoq rise in GNPA to 2.9%. The bank also restructured 0.7% of loans in Q1 (lower than guidance), mainly from the CV/corporate book, with o/s pool at 2.7% of loans. As per management, the bulk of the retail/SME stress formation from the second Covid wave is behind, and normalization should start from H2. The bank believes that it carries a healthy Covid contingent provision of Rs20bn (incl. Rs12bn for restructuring) or 1% of loans, which should largely keep the overall LLP at around 1.9-2%, with +/-10% risk. IIB remains hopeful that the NFB (Rs24bn) exposure to Vodafone may not be invoked and carries a token specific provision of Rs1.5bn toward the FB exposure of Rs9.5bn.

Outlook and valuation:

We believe that the worst in terms of asset quality could be behind us, subject to no severe third Covid wave, while the banks’ healthy provision cover should cushion incremental LLP. We expect IIB’s RoA/RoE to improve from 0.9%/8% to 1.7-1.9%/15- 16% over FY23-24E. Retain Buy with a revised TP of Rs1,375 (2x Jun’23E ABV). Key risks: prolonged normalization of growth/asset quality trajectory and unfavorable outcome in Vodafone (8% of NW).

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