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‘Continue to build provisioning buffer’

NII grew by 10.8% YoY, above estimates despite interest reversal of Rs1.8 bn on proforma slippages as strong support came from -9% YoY decline in the interest cost. Though NIM contracted 4bps sequentially to 4.12%. Impact of 30 bps decline in yield was somehow offset by 20 bps decline in CoF. Indusind Bank (IndusB) reduced deposits rate of 50 bps in Dec’20, the positive impact of which on margin will visible in Q4FY21.

Proforma slippages was Rs25 bn which came broadly from retail segments while corporates accounted for 15% of it. Higher slippages also led to 61 bps sequential increase in GNPA to 2.93%. Provisioning remained elevated to create strong buffer to face assets quality uncertainty. Out of total provision of Rs18.5 bn in Q3FY21, Covid provision was Rs11 bn taking total provision for Covid of Rs33 bn (1.6% of loans). Loan loss provisions including specific, floating and other standard assets provisions stood at 3.3% of loans which seems on higher level thus providing comforts. Restructuring request was received at 1.8% of loans while the bank implemented restructuring on 0.6% of book.

Proforma GNPA and standard restructuring stood at 4.7% of loans. Advances growth remained weak at -0.1% YoY due to sharp contraction in corporate credit (-19% YoY). As per mgmt, demand has been returning broadly across segments with disbursements in vehicles finance and microfinance reached to pre-Covid level. Under planning cycle (2020-23), IndusB will focus on sustainable growth, loan growth at 15-18%, CASA>40% and double the customers base to 45 bn. Capital position will also remain strong with infusion of money by promoters.

While double digit deposits growth is comforting, aggressive standard provisioning has lowered balance sheet risk. Pick-up in disbursements to preCovid level in some of bank’s competences areas such as vehicles finance, micro book is encouraging and will boost business growth. Meanwhile, higher slippages from retail, weak credit growth and development on restructuring book (1.8% of loans) to require close monitoring.

Collection efficiency (CE) in micro book improved to 99% while CE on loans originated after lockdown stands at 99%. Covid led assets quality concerns to remain elevated in the near future (slippages expects at 3.1% in FY22E), though fundamentals are evolving in a right direction. We revised target price to Rs1,175 as raised valuation multiple to 1.8X P/ABV FY23E. Given the sharp rise in share price, we assign ‘Hold’ rating to IndusB

Decline in CoF supports NII growth; provisioning remains elevated

NII grew at 10.8% YoY mainly driven by lower interest cost which reduced by - 8.9% YoY during Q3FY21. Interest income was also contracted by -0.6% YoY weighed down by subdued credit growth and decline in yield amid low interest rate scenario. NIM contracted by 4 bps QoQ to 4.12% also impacted by Rs1.85 bn interest reversal on proforma slippages. Fee income reduced by -7.8% YoY but improved significantly 30.9% on QoQ basis. C/I rose by 3bps QoQ to 41.3% despite -1.4% YoY contraction in OPEX as income growth remained subdued at 4% YoY. Provisioning rose by 77.6% YoY and weighed on PAT which reduced by -36.6% YoY, albeit improved 25.2% sequentially.

Advances growth remains weak; vehicles & microfinance disbursal return to pre-Covid level

Advance de-grew by -0.1% YoY mainly due to sharp -19% YoY contraction in corporate credit. While retail and SME credit grew by 5.8% YoY and 6.7% YoY. In retail segment, credit card grew by 14.2% YoY, micro-finance at 10.8% YoY, vehicles loans at 4.9% YoY and other unsecured loans at 9.2% YoY. Deposits grew by 10.3% YoY and CASA at 5.2% YoY.

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