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The RBI approves re-appointment of MD & CEO for two years

Focus to shift on fundamental performance; estimate FY25 RoE at 18%

* The RBI approved the re-appointment of Mr. Sumant Kathpalia as the MD & CEO of IndusInd Bank (IIB) for a period of two years, effective 24th Mar’23, after his current term ends on 23rd Mar’23. There was uncertainty around his extension and all sorts of conjectures were made with respect to the tenure that will get approved by the central bank.

* We note that there had been instances in the past where despite a shorter term approval, the MD & CEOs of other banks had been able to secure a three- year regular term during subsequent renewals. Refer to Exhibit 1 for more details.

* IIB’s stock price has been under pressure not only due to the macro uncertainty but also because of the clarity around the extension. We thus believe the RBI approval will now shift the focus to the fundamental performance of the bank.

* IIB has been demonstrating a healthy improvement in operating performance fueled by a pick-up in loan growth, strengthening liability franchise and improving asset quality. We estimate IIB to deliver 20% loan CAGR over FY23-25.

* Asset quality risks are receding with a gradual reduction in slippages, which will drive a continued moderation in credit costs. We estimate IIB to deliver ~28% earnings CAGR over FY23-25, while RoA/RoE would expand to 2.2%/18.0%. We reiterate our BUY rating with a TP of INR1,450 (premised on 1.7x Sep’24E ABV).

The RBI approves re-appointment of the MD & CEO for two years

The RBI has approved the re-appointment of Mr. Sumant Kathpalia as the MD & CEO of the bank for a period of two years, effective 24th Mar’23. This has come amid heightened doubts and conjectures on the term of the extension. We note that there had been instances in the past where despite a shorter term approval, the MD & CEOs of other banks had been able to secure a threeyear regular term during subsequent renewals. IIB’s stock price has been under pressure not only due to the macro uncertainty but also because of the clarity around the extension. We thus believe that post this approval from the RBI the focus will now shift to the fundamental performance of the bank.

Growth outlook improving; key business segments to drive growth

IIB is seeing a gradual recovery in growth over the past few quarters, led by a healthy pickup in both Corporate and Retail loans. After reporting a modest growth of ~9% YoY over FY19-22, advances grew ~18-19% YoY in the past three quarters, with Corporate/Retail loans rising 20-23%/13-18%. CV cycle is witnessing an improvement, which along with a recovery in MFI cycle will aid its loan growth. IIB has guided for a loan growth of >20% over medium term

Liability franchise strengthening; retail deposit mix increases to 42%

IIB has been successful in strengthening its liability franchise with intensified focus on garnering Retail deposits. The same clocked 39% CAGR over FY20-22 (+21% YoY in 3QFY23), with the mix as per LCR rising >1,000bp to 42%. Similarly, the concentration of the top 20 depositors fell to 15% (v/s 21.7% in FY21). LCR ratio too remained healthy at ~117%. The management remains focused on increasing the Retail mix to 45-50%. We expect deposits to post 18% CAGR over FY23-25.

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