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Buy Indusind Bank Ltd For Target Rs.1,375

Resurgence 2.0 – Building a more prudent and sustainable retail bank

* IndusInd scripted a major turnaround 1.0 since 2009/10, but faltered lately with higher corporate NPAs/deposit scare. The bank has largely rectified its past mistakes, built prudent capital/provisioning buffers and is preparing to build sustainable & digitally agile retail bank, delivering yesteryear’s superior RoA trajectory of 1.7-1.9% over FY23/24E.

* Amid the ongoing pandemic, the bank intends to shore up contingent buffer (1% of loans) including counter-cyclical buffers given cyclical retail book to bring stability to earnings in long run. We believe that retailization of assets (55% vs. 52%)/liabilities (50% vs. 37%) should structurally improve NIMs/core-PPoP, while moderating LLP should drive-up RoAs.

* IIB assured that risk/governance standards have been strengthened while promoter interference has been virtually NIL, and its recent capital subscription at a premium should provide investor comfort. IIB is waiting for holdco norms to enter into broking/AMC/non-life insurance business, and is open to strategic stake in fintech to strengthen digital offering.

* We believe a resurgent IndusInd with higher retail orientation/risk guards in place should be deliver sustainably higher return ratios, providing a good turnaround story to play on. Retain Buy with a TP of Rs1,375 (vs. 1,175), now based on 2x Jun’23E ABV (1.7x earlier).

* Retailization of B/sheet to drive margins/core profitability:

The bank believes that the funding cost gap of ~130-150bps between IIB and large banks should narrow as it shores up retail TD share to 50% from current 37% (ex-SA), while low-cost refinancing window expands along with PSL portfolio. This, coupled with credit growth acceleration led by retail/SME, should drive up NIMs (>4.3-4.4%)/PPoP~5-5.5%. Within retail, VF/MFI and recently added Affordable housing will be key drivers of growth. IIB expects SME book to grow at 16-18% and capture market share of 5-6% vs. 2-3% now.

* Near-term stress inevitable but LLP should trend down as provision buffers largely in place:

We expect stress to remain elevated in FY22 amid ongoing Covid-induced disruption, particularly in CV/MFI/LAP/SME portfolio but LLP to still trend down to 220bps120bps over FY22-24E vs. 380bps in FY21 as heavy lifting on back-book (75% PCR)/contingent buffer (1% of loans) is largely behind, leading to steady improvement in RoAs. On the corporate front, resolution of retail/construction-linked lumpy corporates as well as ILFS (Rs2.9bn expected recovery) should be positive. On lumpy telecom exposure (FB+NFB of Rs34-35bn), the bank believes a successful capital raising could alleviate concerns.

* Plans to up the digital/fintech play:

The bank wants to bring payments, accounting and loans capability on the table for its customers and thus would look at fintech tie-up/strategic investments. It plans to launch one-of-its-kind digital financing platform for the VF (PV, CV & even tractors) business. The bank has adopted a cylindrical approach on cloud to manage volumes, thereby avoiding outages and has even invested in Enterprise Payments Hub. To evolve as a full-stack digital bank, it plans to incur 5-7% of opex on tech vs. the current level of 2-4%.

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