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Concerns on NPA, deposits cap upsides…
Amid the Covid-19 outbreak, IndusInd Bank disclosed in a conference call various measures undertaken by the bank to combat the business impact of the virus. The major revelation was on the business front, where the management said the bank had seen ~10-11% outflow in deposits post the Yes Bank event (deposit was | 2.2 lakh crore as of December 2019); of this 75% outflows were from government accounts. However, such outflows were offset by longer duration borrowings and commercial papers (MSF remains unutilised). Going ahead, the bank intends to reduce its dependence on bulk deposits and focus on retailisation of liabilities. The management expects deposits to drive business growth in the near term. Therefore, granularising deposits remains the focus area. On advances, the bank has guided moderation for two quarters and growth at ~8-10% for H1FY21E.
Business growth expected to witness moderation
The bank has a major portion of loan book attributable to commercial vehicles (12%), micro-finance (10%) business banking (6%) and real estate (4%). MFI and CV segments appear set to witness near term NPA pressures but moratorium may provide relief for a quarter. The management appeared confident on managing asset quality pains. Lumpy exposure in telecom is one we believe may be a concern but retail, gems & jewellery, etc have not yet seen deterioration.
The management has guided that NIMs would remain stable while on the operational front, the 21 day lockdown could lead opex to reduce in the near term.
Exposure to the micro finance segment and increase in provision coverage ratio is seen keeping provision higher. Thus, the management has guided at PCR of 60% for Q4FY20. It intends to scale it up to 70% ahead while credit cost is expected to be at ~210 bps in Q4FY20E. We revise estimates downwards accordingly and expect a profit decline for FY21 due to balance sheet restructuring (deposits adjustments, lower growth and raising PCR). On promoter stake, the bank said that promoters are seeking RBI's approval to increase stake to 26%. A revert from the central bank is awaited.
Valuation & Outlook
Therefore, the stock price is expected to remain volatile in the near term till B/S realigns and growth resumes. A 10% deposit decline is much larger than earlier 2% outflow initially mentioned by them. We value the bank at 0.7x FY22E ABV with a revised target price of | 400. We maintain HOLD recommendation.
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