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Positive Outlook: Risk-return metrics in place

IndusInd Bank (IIB), a part of the Hinduja Group, provides loans for vehicles, property, etc. in its consumer finance division, while the corporate banking division offers a wide range of products to SMEs and large enterprises.

* NII grew 9.4% YoY as NIM was up 31bps YoY to 5.14%. Core fee income also improved 8.4% YoY.

* Loan book expanded 2.6% QoQ to Rs. 212,595cr, whereas deposits climbed 7.1% QoQ to Rs. 256,205cr.

* GNPA/NNPA jumped to 2.67%/0.69% (vs 1.74%/0.22% in Q3FY21) due to higher amount of restructured advances.

* NRI and affluent banking, tractor financing have acted as growth catalysts for this fiscal. The bank’s yield margins are expected to improve due to exposure to relatively risky assets. However the overall asset quality stress is well in-line with the risk-return expectations of the investors. Hence we upgrade our rating to BUY with a revised target price of Rs. 1,072 using 1.5x FY23E BVPS.

Net profit spikes due to lower provisioning

For Q4FY21, NII reached Rs. 3,535cr (9.4% YoY) with NIM of 5.14% (+31bps YoY). Yield on assets for the quarter was 8.67% (-110bps YoY), while cost of deposits was 5.03% (-98bps YoY). Core Fee income improved to Rs. 1,508cr (8.4% YoY). Growth in remittance (15.9% YoY) and General banking fees (130.0% YoY) were partially offset by decline in Investment Banking (-55.2% YoY). Cost to income ratio was 41.13% (vs 42.90% in Q4FY20). PAT almost tripled to Rs. 876cr (190.2% YoY). In addition to cost efficiencies, lower provisions this quarter (-23.5% YoY) also caused this jump.

Slippages higher due to restructuring

Loan book stood at Rs. 212,595cr (2.6% QoQ, 11.78% yields) as Corporate lending reached Rs. 91,018cr (2.8% QoQ, 8.42% yield) and Consumer Finance at Rs. 121,577 (2.4% QoQ, 14.27% yield). About 30% of the consumer loan portfolio (comprising MIF and C.V loans) could again come under stress over upcoming quarter due to lockdown implications. As slippages were Rs. 3,829cr, GNPA/NNPA climbed to 2.67%/0.69% (vs. 1.74%/0.22% in Q3FY21) respectively. Proportion of advances restructured were 2.0% (vs 0.8% in Q3FY21) of which 1.8% were pandemic related. Total deposits surged 26.8% YoY to Rs. 256,205cr; CASA ratio stood at 41.7% (vs. 40.4% in Q3FY21).

Key concall highlights

* Gross NPA concentration has been high in C.V and LAP segments. Sales to ARC has been Rs. 830cr and Net SR outstanding at 52bps.

* Gross credit costs of Rs. 2,586cr for Q4FY21 includes Rs. 1,535cr of standard provisions reclassified as credit costs towards pro-forma NPA. Standard asset provisions has been Rs. 1,009cr (other than COVID related).

* With risk buffers in place, Capital adequacy/CET1 ratio has been increased to 17.38%/15.55% (vs. 16.93%/14.89% in Q3FY21)

Outlook & Valuation

NRI and affluent banking, tractor financing have acted as growth catalysts for this fiscal. The bank’s yield margins are expected to improve due to exposure to relatively risky assets. However the overall asset quality stress is well in-line with the risk-return expectations of the investors. Hence we upgrade our rating to BUY with a revised target price of Rs. 1,072 using 1.5x FY23E BVPS.

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