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Buy Indusind Bank  Ltd For Target Rs.1,362

Most of the microfinance stress stands recognised

Result Highlights

* Asset quality: Gross slippages amounted to Rs 26.58bn (annualized slippage ratio of 4.9%) and recoveries and upgrades amounted to Rs 11.92bn

* Margin picture: NIM at 4.07% inched up1 bpQoQ as decline in cost of deposits and yield on advances were similar in quantum

* Asset growth: Advances grew 4.8%/9.7% QoQ/YoY driven sequentially by wholesale loans

* Opex control: Total opex rose 2.8%/13.7% QoQ/YoY, employee expenses moved -1.1%/14.8% QoQ/YoY and other expenses rose 7.1%/16.4% QoQ/YoY

* Fee income: Core fee income rose 24.1%/41.9% QoQ/YoY driven by higher card spends, among other factors

Our view –

Most of the microfinance stress stands recognised Most of the gross slippages emerged from the microfinance and vehicle finance books at Rs 10.7bn and Rs 5.9bn, respectively: Notably, recoveries and upgrades in these segments were also healthy, leading to net slippages of Rs 4.6bn and Rs 0.35bn, respectively. Management stated that it expected 6-8% of the microfinance book to turn delinquent but had already taken ~75% of this hit. Total restructured book amounted to Rs 79.82bn as of September 2021 compared with Rs 56.57bn as of June 2021. Management re-iterated credit cost guidance of 160-190 bps with the conservatively made caveat that there could be incremental provisions on Vodafone Idea exposure, whose funded portion was fully provided for during the quarter.

Yield declined 9 bps QoQ whereas cost of deposits declined 14 bps QoQ to 4.85%: Yield declined sequentially due to loan mix change in favour of corporate loans and, within corporate loans, in favour of high-rated corporates. LCR stood at 148% and excess investments amounted to over Rs 590bn.

Wholesale loans grew 7.2% QoQ whereas non-wholesale loans grew 2.9% QoQ: Within wholesale loans, large corporate loans jumped 13.0% QoQ. Within retail loans, parts of vehicle finance in the form of utility, car and tractor loans and unsecured retail loans in the form of credit cards and microfinance drove sequential growth. Management stated that, over the next 18 months, the bank would ramp up growth. In corporate loans, the bank would grow about 200 bps faster than the market.

We maintain ‘Buy’ rating on IIB with a revised price target of Rs 1362: We value the bank at 2.1x FY23 P/BV for an FY22E/23E/24E RoE profile of 11.7/13.7/14.3%.

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