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Growth & margin strong; Retail asset quality deteriorated

Result and Price Analysis

Indusind Bank has reported stable set of numbers and the positives are 1) 68% YoY jump in reported profit, led by NIMs expansion (4.27%) and lower provisioning expenses (down 36% YoY), 2) Strong business growth (credit: 19.3% YoY, Deposits: 14.3% YoY), 3) Stable PCR level (PCR: 71% & Non-specific: 1.25% of book), 4) Reduction in restructuring book to 1.25% v/s 1.5% in the previous quarter, 5) Ample capital cushion (CAR: 18.01%), Nevertheless, the spike in consumer GNPA (2.6% v/s 2.36%) is the biggest disappointment. We believe, the bank has made adequate provisioning against potential stress. However, the delinquencies from vehicles segment and credit cost in next quarter will be keenly watched. Moreover, a healthy CDR (84%) gives further room for credit growth. We have a positive outlook on the Bank with a BUY rating

Gazing the Core

Outperforming growth guidance: The bank’s net advances stood at ~Rs 2.7tn; grew 19.3% YOY and 5% sequentially. Corporate banking (47% of loan book) grew by 4.3% QoQ and retail (53% of book) growth at 5.3% QoQ. Vehicle loan (26% of loan book) grew by 6.7% QoQ and Micro loan (11% of loan book) witnessed marginal growth of 0.2% sequentially. Vehicle financing witnessed strong disbursement (Rs 12.7bn; 19% QoQ). Management guidance on the credit growth of ~20% for FY23 stays intact. The bank’s deposits stood at ~Rs 3.25tn and saw a healthy growth of 14.3% YOY and 3% QOQ; CASA ratio down by 40bps to 41.9%. The bank is holding ample liquidity (LCR: 117%). The CRAR stood at 18.01% similar to 2QFY23 with CET 1 of 16.01%. RWA to assets stood flat at 73%.

Retail credit quality a major disappointment; buffer seems satisfactory:

The bank’s reported gross slippages inched down significantly to Rs 14.7bn against Rs 15.7bn the in previous quarter. Retail slippages contributed around 93% (Rs13.8bn) of total fresh GNPA additions. The slippages from restructuring book was Rs 3.3bn (23% of the total slippages). Total GNPA reduction stood at Rs 13.2bn v/s Rs19.3bn in 2QFY23 led by lower write-offs (~Rs 8bn). A lower slippages, nevertheless, slower reduction (upgrade and recovery) led to decrease in GNPA ratio marginally by 5bps to 2.06%. In absolute term GNPA up by 2.6% sequentially.

However, the higher slippages and increased GNPA ratio (2.6% v/s 2.36% in 2QFY23) from consumer loans raised eyebrows. NPA ratio increased across vehicle segment; 2W segment witnessed a moderation. The movement of delinquencies from Vehicle loans will be keenly watched in coming quarters. GNPA/NNPA/PCR stood at 2.11%/0.61%/72% v/s 2.06%/0.62%/71% in the previous quarter. In absolute term the GNPA increased by 2.6% sequentially. In retail banking, 2-wheeler segment and CV segment have higher GNPA ratio of 7.5% and 2.2% respectively. Moreover, micro loans GNPA increased by 24bps to 2.6%. The standard restructured assets went down and stood ~Rs 34bn (1.25% of book) v/s Rs 39bn (1.5%) in 2QFY23. Additionally, Rs 3.3bn of restructuring has slipped into NPA this quarter. The bank’s provision expenses down sequentially to Rs 10.6bn v/s Rs 11.4bn in the previous quarter. The total provisions (including contingent) stand at 130% of GNPLs and contingent provision (excluding PCR) stood 1.25% of loans. The bank’s coverage on MFI NPAs is at 99%.

Healthy operating quarter:

The YoA sequentially up (11.75%) and COF (4.72% v/s 4.41% in previous quarter) have resulted in spike in interest spread. Moreover, NIMs marginally up at 4.27% sequentially. NII stood Rs 45bn; grew by 18.5% YoY and 4.5% QoQ. Other income grew by 10.6% YoY and 3.3% QoQ. *: PPoP (Rs 36.8bn) up by 4.6% sequentially on the back of higher NII and lower opex (C/I: 44%). Furthermore, sequentially down provisioning expenses (Rs 10.6bn v/s Rs 11.4n in 2QFY23) have resulted in 68% YoY and 10% sequential jump in profit at Rs 19.6bn. The bank’s ROA and ROE stood at 1.86% and 15.23% respectively. Management FY23E ROA guidance of 1.5% - 1.8% seems achievable, nonetheless, the credit cost for the next quarter will be key monitor-able.

Outlook & Valuation

Core operating performance of the Indusind Bank remains healthy. A higher contingent buffer is likely to safeguard the bank from credit disruption from various restructure schemes. We retain our rating to BUY with price target of ?1473 (based on 1.8x FY24E Adj. BVPS of ?818).

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