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Navigating uncertainties

IndusInd Bank (IIB IN) reported yet another soft quarter with weakness in multiple lines. The highlights were: 1) weakness in NIMs (down 15bps QoQ) with lower growth and softer core-fee feeding into softer core operating growth, b) higher slippages (2.6%) with rise across a few key segments and c) lower-than-estimated credit cost as IIB utilized INR 2bn of contingent provisions. The discussions hereon will be on: a) core profitability trajectory, b) asset quality outcomes, c) softer issues (management tenor renewal) and d) certain promotor aspects. Most of the risks with IIB seem to have played out and it is undergoing a period of uncertainty. We think recovery hereon could be elongated. That said, notwithstanding near-term uncertainty, valuations at 0.9x FY26E P/BV (cheaper than regional and certain PSU banks) do suggest limited downside. The merit of holding it for the medium term is strong as IIB can still deliver 1.7% RoA/13-14% RoE in the medium term, and most negatives seem to be priced in. We maintain BUY with TP of INR 1,320 (unchanged).

Asset quality trend needs a watch:

Slippages rose to ~INR 22bn, at ~2.6%, with ~30% coming from MFI, ~30% from vehicle and ~25% from unsecured retail. Looking at segment-wise GNPLs, the rise was seen across segments, which needs a watch. While recent trends have seen improvement on MFI, the situation is still vulnerable warranting a cautious stance. We expect two quarters of sticky slippages and credit cost outcomes. The credit cost was lower as IIB utilized INR 2bn of contingency provisions (INR 1.6bn for MFI and INR 0.4bn towards a restructured corporate, which slipped into NPLs). Amidst all this, IIB maintained a coverage of 70%. We believe such instances have dented investor confidence, creating a vulnerable position.

Price chart

Core soft; volatility concerning:

IIB yet again saw softer core operating performance with NIMs dropping 15bps QoQ (impacted by de-growth in high-yielding MFI segment). This with below-trend loan growth outcomes (up 12% YoY) and lower core fee (down 2% YoY) fed into lower core profitability. IIB’s relative miss (to peers) and volatility on core operating performance have been challenges and are key to a re-rating.

Reiterate BUY with TP of INR 1,320:

Despite being better placed to capture turning rates table, volatile performance has been a key disappointment for IIB. While the bank has built contingency buffer in addition to coverage of +70%, which may rein in credit cost, variability on these is monitorable, especially in light of challenges in certain segments.

IIB seems to be transitioning through a period of uncertainties which makes consistency elusive. Add to that, uncertainties on softer aspect (biggest risk to our mind) would entail elongated recovery at this juncture. Despite this, the merit of holding it for the medium term looks strong as IIB can still deliver 1.7% RoA/13-14% RoE in the medium term. Maintain BUY.

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