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IndusInd Bank (IIB) demonstrated 1.8% RoA and 14.45% RoE in Q2FY23, thereby improving visibility of it being able to deliver >5% PPoP/loans, 1.7%/1.9% RoAs and 14.4%/15.7% RoEs by FY23E/FY24E respectively. 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:

NIMs improved 3bps QoQ to 4.24% (least anticipated from IIB in this quarter). Though 12bps improvement in yield on advances was inadequate to offset 31bps increase in cost of deposits, deployment of excess liquidity supported 30bps QoQ rise in yield on assets. o Slippages contracted to 2.5% with 37% flowing from the restructured pool as 24% of Mar’22 restructured pool turned delinquent in H1. Aggressive write-offs (equivalent to 45bps of advances) aided the plunge in GNPAs to 2.11% (from 2.35% QoQ). o Advances were up 4.9% QoQ, 17.8% YoY, with growth being broad-based across vehicle financing (up 4% QoQ / 13% YoY), corporate lending (6% QoQ / 23% YoY), credit card (10% QoQ / 42% YoY) and BL/PL/affordable housing (7% QoQ / 34% YoY). MFI portfolio lagged an improvement (up 1% QoQ / 4% YoY). Management now expects credit growth to surpass 20% for FY23. o Core PPOP growth of 18% YoY was led by 18% YoY NII growth, further supported by fee income growth of 24% YoY and treasury gain of Rs1.4bn.

What was not encouraging:

Despite utilising contingency buffer of Rs3.5bn, credit cost settled at 1.8%. H2FY23 asking run-rate is mere 1.0-1.2% for its credit cost guidance of 1.2-1.5% through FY23. o Operating cost further gathered pace with 5.4% QoQ / 21.6% YoY growth as employee cost was up 9% QoQ / 19% YoY. Opex to assets settled at 2.65%

What to expect for FY23:

IIB is now carrying provisioning of 3% against stress pool (NPA + restructuring + SMA-1/2 + net SRs) of 5.1%, which suggests credit cost trajectory should normalise to <1.7%. o This will likely be partially offset by pressure on NIMs given the dominance of fixedrate portfolio and focus on retail TD mobilisation. o Scale-up of retail, investment in franchise expansion and technology initiatives are expected to drive up cost structure. o 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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