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Buy IndusInd Bank Ltd For Target Rs.1,200

Operating performance in line; asset quality deteriorates, but recovery underway

Healthy coverage and contingent provisioning provide comfort

* IIB reported an in line earnings performance. However, credit cost in 1QFY22 stood elevated on account of higher slippages in the Retail portfolio. NII growth remained muted due to moderation in loan growth. NIM declined by 7bp QoQ to 4.06% due to excess liquidity. Deposit trends continue to remain strong, led by Retail deposits.

* Fresh slippages stood at INR27.6b (annualized 5.2% of loans), predominantly led by Retail (INR23.4b), with higher slippages in the MFI/Vehicle segment. This was largely due to the hampering of collections over Apr-May’21. The GNPA/NNPA ratio increased by 21bp/15bp to 2.88%/0.84%, while PCR stood healthy at 71.6%. Restructured book increased to 2.7% of loans (v/s 2% in FY21). Healthy coverage and contingent provisioning buffer at 1% of loans provides comfort. We maintain our earnings estimate for FY22E/FY23E. We reiterate our BUY rating.

Liability franchise improving steadily; PCR healthy ~72%

* IIB reported a PAT of INR10.2b (15% beat; 99% YoY), aided by higher other income v/s our estimate. Provisions continue to remain elevated at INR18.4b (annualized credit cost at 3.5%), due to higher slippages in the Retail portfolio, as collections were hampered significantly over AprMay’21.

* NII growth stood muted ~8% YoY to INR35.6b (in line), affected by weak loan growth. NIM declined by 7bp QoQ to 4.06% due to surplus liquidity available on the Balance Sheet. Fee income grew 78% YoY (supported by a benign base). Other income grew 18% YoY. PPOP rose ~9% YoY to INR31.8b.

* On the business front, advances declined sequentially by 0.9% QoQ (up 6.4% YoY). Among segments, Wholesale growth stood ~2% QoQ (10% YoY), while most Retail segments declined. Thus, the Retail-to-Wholesale mix stood at 56:44. Deposit traction continues to remain strong (26% YoY/4% QoQ) at INR2.7t, led by 33% YoY CASA growth. CASA ratio improved to 42.1% (40bp QoQ improvement).

* On the asset quality front, fresh slippages stood elevated at INR27.6b (annualized 5.2% of loans), led by Retail (INR23.4b), mainly Vehicle Finance (INR10.6b) and MFI (INR6.7b). The GNPA ratio increased sharply in the Small CV and TW segment. Overall, GNPA/NNPA ratio increased by 21bp/15bp to 2.88%/0.84%. PCR ratio stood at 71.6% (v/s 74.5% in FY21). Total restructuring increased to 2.7% of loans (v/s 2% in FY21). In 1QFY22, higher restructuring was implemented in the Vehicle segment. Collection efficiency at the portfolio level improved to 96% in Jun’21.

Highlights from the management commentary

* Collection efficiency in MFI stood at 89% in Jun’21 and currently stands in the mid-90s. Among states, recovery in Kerala, West Bengal, and Karnataka is happening with a lag, with the collection efficiency at 82-83%. Also, collection efficiency in the Vehicle portfolio improved to 97% in Jun’21.

* It expects loan growth between 16% and 18% CAGR over the next two years. Realignment of the Corporate book is complete and the focus is back on growth.

* IIB expects credit cost to remain at 160-180bp under a normal scenario.

Valuation and view

IIB reported an in line operating performance in a challenging environment. Loan growth moderated, while the liability franchise continues to show an improvement, driving a consistent reduction in funding cost. Asset quality witnessed pressures as collections were hampered in Apr-Mar’21, with stress dominated by Retail, particularly in the MFI/Vehicle segment. Restructured book increased to 2.7% (v/s 2% in FY21), which is higher compared to other large peers.

However, collection efficiency has recovered sharply to 96% as on Jun’21. We expect these trends to improve further. Higher provision coverage and contingent provisioning of 1% of loans provides comfort. We expect IIB to deliver a FY23E RoA/RoE of 1.7%/14.4%. We maintain our Buy rating with an unchanged TP of INR1,200/share (1.8x FY23E ABV).

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