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Indusind Bank (IIB IN) reported strong set of numbers for Q1FY23 with robust improvement in the business growth and profitability. NII grew by 15.8% YoY on healthy interest income and contained CoF leading to increase in NIM to 4.21%. PAT rose by 60.5% YoY to Rs16 bn (above our estimate of Rs13 bn) led by strong core operating performance and decline in the credit cost. Bank also managed to avoid the MTM losses on active trading strategies. Loan growth rose to multi-quarter high at 17.7% YoY driven by strong growth across broader segments, however expansion in the microfinance book paused after a significant pick-up in the previous quarter owing to regulatory changes.

GNPA rises on higher slippages: Led by 8% sequential increase in slippages and weak R&U, GNPA rose by 8 bps QoQ to 2.35%. Gross slippages rose to Rs22.5 bn with slippages rate rising to 95 bps in the reported quarter from 92 bps in Q4FY22. Slippages from retail segment continued to remain high at 73% of the total slippages. 64% of the total retail slippages came from retail standard book which is disappointing. However, on sequential basis, the proportion of gross slippages from the standard loan book declined to 59% v/s 81% in previous quarter.

Stress book declines: Restructuring book reduced by 50 bps QoQ to 2.1% due to higher slippages of Rs9.2 bn in Q1FY23 (Rs3.9 bn in Q4FY22). The bank utilized contingent provisions of Rs3.3 bn, despite this standard provision at 1.7% of loans (1.8% in Q4FY22) remains at the healthy level.

View & Valuation: With the restoration of growth in retail book and likely strong pick-up in high yielding microfinance loan book, NIM is expected to remain at healthy level of ~4.2% despite increasing cost of deposits. Continued robust growth in deposits (13.2% YoY & 3.2% QoQ) is comforting on the back of bank’s strong focus on strengthening liability franchise. Bank planned to increase branches to 2,500 by FY23 (from 2,286 in Q1FY23) which along with focus on digital will help IIB IN to increase the share of retail in the total deposits to the target level of 45%. However, we remain watchful on assets quality front because of continued higher slippages from the standard book. Prevailing stress in the microfinance sector added to the concerns. Thereby, we increased our slippages/credit cost estimates to 3%/2% over FY23-FY24E. RoE is expected to improve to 13.0% in FY24E from 10.5% in FY22.

We re-iterate our HOLD rating on IIB IN with target price of Rs1,100 per share, valuing bank at 1.5x FY24E P/Adjusted Book Value.

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