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Delivering on the guided path; credit growth of >18%, RoA at 1.87%, RoE of >15%

IndusInd Bank (IIB) has reported 1.87% RoA and >15% RoE in Q3FY23, thereby improving visibility of it being able to deliver >5% PPoP/loans, 1.9% RoAs and 16% RoEs by FY24E. Maintain BUY with target price unchanged at Rs1,420 (1.8x FY24E book). Key risks: 1) Higher opex towards franchise investment, 2) credit cost not normalising soon.

What surprised positively

* Despite flat MFI portfolio, acceleration in retail advance growth to 18.4% YoY (vs 13.7% / 12.9% / 6.6% in Q2/Q1FY23 / Q4FY22) aided overall advance growth at 4.6% QoQ and 19% YoY. Broad-based and highest ever vehicle finance disbursements (up 19% QoQ / 44% YoY) reinforced growth in vehicle financing portfolio at 6.7% QoQ / 18% YoY. Credit card portfolio on a low base scaled up 8.7% QoQ / 45.5% YoY and BL/PL/affordable housing was up 12.7% QoQ /46.7% YoY. Corporate loan book was up 4% QoQ/20% YoY led by 11% QoQ growth in small corporates.

* Core PPoP growth of 20% YoY was led by 18.5% YoY NII growth, further supported by fee income growth of 28% YoY and treasury gain of Rs1.4bn.

* Corporate banking yield further expanded 37bps (over 40bps in Q2) to 8.57%, reflecting repricing benefit (as MCLR-linked and EBLR-linked is 40% each). o Slippages moderated a tad to 2.3% at Rs14.7bn and GNPAs came off further to 2.06% (from 2.11% / 2.35% in Q2FY23 / Q1FY23). More so, >20% of slippages (Rs2.9bn) flowed from restructured pool. Corporate slippages were contained at only Rs1.2bn.

What was not encouraging

* MFI portfolio was just flat QoQ lagging an improvement (up 8% YoY). MFI GNPA also rose to 3.75% vs 2.91%. Management expects it to normalise in 1-2 quarters.

* Despite utilising contingency buffer of Rs4.6bn, credit cost settled at 1.6%. Credit cost guidance of 1.2-1.5% through FY23 seems stretched now.

* Consumer banking yields improved only 16bps to 14.5% and overall yield improvement was capped at 24bps QoQ vs 37bps rise in deposit cost. However, surplus liquidity deployment supported NIMs at 4.27% (up 3bps QoQ).

* Asset quality deteriorated in vehicle financing segment with CV GPAs at 2.21% vs 2.0% QoQ, CE GNPA at 1.88% vs 1.44% QoQ, tractor at 186% vs 1.62% QoQ.

* Operating cost has further gathered pace with 4% QoQ / 22% YoY growth as employee cost was up 8% QoQ / 26% YoY

What to expect going forward

* IIB is now carrying provisioning of 2.7% against stress pool (NPA + restructuring + SMA1/2 + net SRs) of 4.3%, which suggests credit cost trajectory should normalise to <1.7%.

* This may be partially offset by pressure on NIMs given the dominance of fixed-rate portfolio and focus on retail TD mobilisation.

* Revival in MFI and some vehicle financing products, and encouraging growth in corporate lending, to drive loan growth towards the 2-year target of 15-18%

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