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Re-gaining glory; leaping toward normalization

CE improves further; proforma coverage, prudential provisioning provide comfort

* IndusInd Bank (IIB) reported a strong quarter with a 45% beat in PAT, led by a steady operating performance. The deposit portfolio grew 5% QoQ, while collection efficiency was steady at 97% (in-line with large peers).

* The proforma GNPA/NNPA ratio stood at 2.93%/0.70%, with PCR at 77% (the highest thus far among the banks under our coverage). The bank restructured 0.6% of loans, while we expect this to increase to 1.8% by 4QFY21. We increase our earnings estimate for FY22/FY23 by 35%/14%, factoring in improvement in operating performance and moderation in credit cost. Maintain BUY.

Business momentum improving; proforma PCR healthy at 77%

* IIB reported PAT of INR8.3b (25% QoQ growth; above estimate), aided by improvement in core operating performance and lower provisions.

* NII grew ~11% YoY to INR34.1b (3% higher) even as margins declined 4bp QoQ to 4.12%, impacted by interest reversal. Fee income picked up sequentially to 31%, while opex was broadly flat YoY. PPoP, thus, grew ~7% YoY to INR29.6b.

* Advances growth picked up sequentially to 3.2%, aided by festive season and improved demand. The Wholesale book grew 3.6% QoQ and the Retail portfolio increased 2.4% QoQ. Within retail segments, Tractor Financing grew 13% QoQ, 2-Wheelers 5% QoQ, Car Loans 6% QoQ, Credit Card 8% QoQ, and the MFI book 3% QoQ. The Retail to Wholesale mix stood at 57:43.

* Deposit traction remains strong at 5% QoQ growth to INR2.4t. The CASA ratio improved to 40.4% (v/s 40.3% in 2QFY21), with SA deposits increasing 13% QoQ.

* On the asset quality front, the GNPA/NNPA ratio declined 47bp/30bp to 1.74%/0.22%, while the proforma GNPA/NNPA ratio stood at 2.93%/0.70%. Thus, proforma PCR improved to 77%, the highest amongst peers. Restructured loans toward COVID-19 stood at 0.6%; the bank has recommended another 1.2% of restructuring in 4QFY21 as well. IIB holds additional COVID-19 provisions of INR10b, which (along with select resolutions) would enable further decline in provisioning expenses.

* Collection efficiency: CE in the Vehicle portfolio improved to 96.9% (v/s 94.3% in Sep’20), while the MFI book’s CE has improved to 95.5% as of Jan’21 (v/s 87.2% in Sep’20). Overall, CE for the bank stood at 97.1% as of Dec’20 (in line with that of large peers).

Highlights from management commentary

* Proforma slippages stood at 1.2% of loans (INR25.1b) – with Vehicle/MFI contributing 20% each, other secured retail 15%, unsecured retail 30%, and the corporate portfolio contributing the balance 15%.

* Overall, IIB expect restructuring at 1.8% of loans, with Vehicle contributing 30%, other retail assets 13%, and the balance contributed by corporate. Only two accounts in the corporate book were restructured (Construction and Retail).

Valuation and view

IIB reported a strong quarter with PAT beat aided by an improving business environment and asset quality outlook. Loan growth is showing signs of revival in both Wholesale and Retail, while the deposit franchise is also improving steadily – enabling moderation in funding costs. IIB has reported an improvement in CE in both the Vehicle and MFI portfolios, while the restructuring book is under control. The bank has reported strong improvement in asset quality, with one of the highest proforma coverages – this assuages the concerns around asset quality in recent quarters. We thus increase our FY22/FY23 earnings by 35%/14%, factoring in improvement in operating performance and moderation in credit cost. We expect IIB to deliver FY23E ROA/ROE of 1.8%/16.5%. Maintain Buy, with revised TP of INR1,200 (1.9x Sep’22e ABV).

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