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Modest quarter; guides a robust growth outlook

Asset quality deteriorates slightly

* IndusInd Bank (IIB) posted a 1QFY25 PAT of ~INR21.7b (7% miss) due to modest revenue growth. NII grew 11% YoY to INR54.1b (3% miss) and other income rose 10.5% YoY to INR24.4b (5% miss). NIM was broadly stable at 4.25%.

* Loan book grew 15% YoY (1.3% QoQ), led by corporate book. Deposits grew 15% YoY (4% QoQ), led by term deposits. CASA ratio moderated 121bp QoQ to 36.7%. Growth in the card business was muted.

* Fresh slippages increased 7.6% QoQ to INR15.4b, primarily due to a rise in slippages in the consumer finance book to INR14.9b. GNPA/NNPA ratios increased 10bp/3bp QoQ to 2.02%/0.6%. The bank did not utilize any contingent provisions and held INR10b of contingency buffer as of Jun’24.

* We cut our earnings estimates by 7.7%/8.0% for FY25/26, leading to an RoA/RoE of 1.83%/15.4% by FY26E. We reiterate our BUY rating on the stock with a TP of INR1,700 (premised on 1.7x FY26E ABV)

NIM stable at 4.25%; card business to remain subdued

* IIB reported 1QFY25 PAT of ~INR21.7b (7% miss) due to lower other income and NII.

* NII grew 11% YoY to INR54.1b (3% miss). Other income rose 10.5% YoY (5% miss) as treasury income stood at INR930m (vs. INR2.2b in 4QFY24). Total revenue grew 11% YoY to INR78.5b. NIM was broadly stable at 4.25%. Management expects to maintain NIM within range of 4.2-4.3%.

* Opex grew 20% YoY to INR39b (in line). C/I ratio increased 150bp QoQ to 49.2%. PPoP inched up 3% YoY to ~INR39.5b (6% miss).

* On the business front, loans grew 15% YoY (1.3% QoQ), led by corporate book (3% QoQ growth). In consumer business, credit cards posted a modest growth, while microfinance declined 5.5% QoQ. Card fees dipped due to the loss of over-limit fees driven by regulatory directions. Further, the inter-change on rentals was eliminated and the new card acquisition rate was lower.

* Deposits grew 15% YoY (4% QoQ), led by term deposits. CASA ratio moderated 121bp QoQ to 36.7%. Retail deposit mix as per LCR stood at 44%. The CD ratio stood at 87.3% in 1QFY25.

* Fresh slippages increased 7.6% QoQ to INR15.4b, primarily due to a rise in slippages in the consumer finance book to INR14.9b. GNPA/NNPA ratios increased 10bp/3bp QoQ to 2.02%/0.6%. The bank did not utilize any contingent provisions and held INR10b of contingency buffer as of Jun’24. The restructured book declined 6bp QoQ to 0.3%.

Highlights from the management commentary

* The card fees dropped in 1QFY25 as: 1) the Regulator has come up with a directive that over-limit fees cannot be charged, and this led to a INR240m drop in card fees; 2) the new card acquisition rate was lower, and 3) the interchange on rentals was eliminated, which resulted in a slight fee income loss (INR100m) for the bank.

* CD stood ratio at 87.3% and IIB expects this to remain ~88-90% going forward.

* The management guided ~18-22% growth for FY25.

* Slippages breakup: INR6.6b for vehicle finance, INR3.38b for Bharat Financial, INR480m for corporates, INR4.9b for other retail.

Valuation and view:

IIB reported a mixed quarter, as lower income growth and NII dragged down earnings. However, deposit growth was healthy, led by term deposits. The NIM trajectory remained stable, and management guided stable trends going forward. The asset quality ratios deteriorated marginally as fresh slippages increased primarily in the consumer finance book. IIB guided a loan growth of 18-22% for FY25 as it looks to operate at a CD ratio of 88-90%. The bank indicated a credit cost of 110-130bp over FY25E, while it does not plan to use contingent provisions (INR10b). While MF and Card businesses may continue to report some stress in the near term, the overall slippages are likely to remain in control and will help maintain broadly stable asset quality. We cut our earnings estimates by 7.7%/8.0% for FY25/26, leading to an RoA/RoE of 1.83%/15.4% by FY26. We reiterate our BUY rating on the stock with a TP of INR1,700 (premised on 1.7x FY26E ABV).

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