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Levers available towards delivering >5% PPoP/loans and >1.6% RoAs

IndusInd Bank’s (IIB) focus on prudent provisioning, ramping up of a granular deposit base, risk-calibrated growth, and driving core fee income is reflected in Q1FY22 performance as well. As anticipated, incremental stress in vehicle financing, MFI and other retail segments led to elevated slippages of >5%. Nevertheless, upgrades, sale to ARCs and write-offs capped GNPAs at sub-3% level.

Despite creating further contingency buffer, credit cost was managed as expected at 3.5%. Overall restructuring is also being contained at 5% PPoP/loans, >1.6% RoAs and 15% RoEs by FY23E. Maintain BUY with an unchanged target price of Rs1,260. Key risks: 1) upfront recognition of telecom stress exposure, and 2) credit cost not normalising soon.

* As anticipated, stress in vulnerable segments triggers elevated slippages: Anticipating incremental stress in vehicle financing, MFI and other retail segments, we envisaged elevated slippages in Q1FY22. On expected lines, slippages were >5% at Rs27.6bn. Of this, 85% flowed from consumer financing business while corporate slippages were range-bound. Within the retail segment, vehicle financing dominated incremental stress with Rs10.6bn slippages (>1.5% of vehicle advances), followed by MFI at Rs6.4bn (3% of MFI lending). Unsecured portfolio stress was contained at 2.8% vs 8-9% in FY21. With upgrades of Rs8.45bn (>50% in MFI loans), sale to ARC of Rs4bn and write-offs of Rs9.4bn, rise in GNPAs was capped at 20bps at 2.88%. We expected it to settle at >3%. Uptick in collection efficiency in Jun/Jul’21 suggest incremental stress will be lower and, with recoveries likely to pick up in H2FY22, GNPAs too should settle lower.

* Invoked restructuring at 2.7%; MFI restructuring yet to be implemented: IIB implemented incremental restructuring equivalent to 70bps of advances (60% in corporate, 40% in vehicle financing and other retail). With this, restructuring has been cumulatively invoked on 2.7% of the loans: 1) vehicle loans constituted 55% (5% of vehicle advances), 2) non-vehicle retail at 15% (1.3% of the pool), and 3) balance 30% in corporate banking (2% of corporate loans). Restructuring in MFI segment was at only Rs0.7bn, though there is pipeline of Rs5bn to be implemented (2% of MFI advances). Overall, restructuring seems contained below 3%, which is commendable.

* Credit cost at 3.5% despite creation of further contingency buffer: IIB built further contingency buffer of Rs4.5bn taking the cumulative buffer to Rs20.5bn (1% of advances). Yet, overall credit cost was as expected at 3.5%. Lending comfort on incremental stress are the following: 1) corporate SMA-2 at 47bps, and 2) collection efficiency at 96% in Jun’21 and improving further in the past few weeks. Bank now carries specific LLP of 1.7% (72% coverage), contingent provisions of 1%, and standard / general / other provisions of 0.9%. We are building-in slippages at 3.7% / 2.0% and credit cost at 1.9% / 1.5% over FY22E / FY23E, respectively.

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