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Weak quarter; steering through near-term challenges

Other income muted; asset quality remains under watch

* IndusInd Bank (IIB)’s PAT declined 40% YoY/ 39% QoQ at ~INR13.3b (17% miss adjusted for contingent provision of INR5.25b).

* NII grew 5% YoY to INR53.5b (in-line), while other income declined 10.5% QoQ to INR21.85b (14% miss). NIM contracted sharply by 17bp QoQ to 4.08%.

* Loan book grew 13% YoY (2.7% QoQ), led by corporate and commercial books. Deposits grew 15% YoY (3.5% QoQ), led by faster growth in term deposits. Growth of MFIs declined sharply by 12% QoQ.

* Fresh slippages increased 17% QoQ to INR17.9b, primarily due to a rise in slippages in the consumer finance book to INR16.8b. GNPA/NNPA ratios increased 9bp/4bp QoQ to 2.11%/0.64%. IIB holds a total contingency buffer of INR15.25b as of Sep’24.

* We cut our earnings estimates by 16.7%/8.7% for FY25/26, leading to an RoA/RoE of 1.6%/13.6% by FY26. Reiterate BUY with a TP of INR1,500 (premised on 1.5x FY26E ABV). Progression on asset quality (MFI business) and RBI’s approval for a fresh term for the MD and CEO remain key nearterm events to monitor.

NIM contracts sharply to 4.08%; MFI mix declines 149bp to 9.2% of loans

* IIB reported 2QFY25 PAT of ~INR13.3b amid the higher-than-expected provisions as the bank made a contingency provision of INR5.25b in 2Q.

* 1HFY25 PAT stood at INR35b (down 19% YoY), while 2HFY25 PAT is expected to be at INR38.8b (down 17% YoY).

* NII grew 5% YoY (down 1% QoQ) to INR53.5b (in-line). Other income declined 4.2% YoY (14% miss) amid the decline in the core fee income, while treasury income stood at INR1.62b (vs. INR930m in 1QFY25). The total revenue increased 2.4% YoY to INR75.3b. NIM contracted sharply by 17bp QoQ to 4.08% as the bank experienced slow growth in its high-yielding business.

* Opex grew 14% YoY to INR39b (in-line). C/I ratio increased sharply by 255bp QoQ to 52.2%. PPoP declined 8% YoY to ~INR35.9b (10% miss).

* On the business front, loans grew 13% YoY (2.7% QoQ) amid the pickup in corporate book (7% QoQ growth). In the consumer business, MFI book witnessed a decline of 12% QoQ, cards experienced a modest growth, while VF book also experienced a slower growth.

* Deposits grew 15% YoY (3.5% QoQ), led by healthy growth in term deposits. CASA ratio moderated 80bp QoQ to 35.9%. Retail deposit mix as per LCR stood at 44%. CD ratio stood at 86.6% in 2QFY25, down 69bp QoQ.

* Fresh slippages increased 17.1% QoQ to INR17.98b, primarily due to a rise in slippages in the consumer finance book to INR16.8b. GNPA/NNPA ratios increased 9bp/4bp QoQ to 2.11%/0.64%. The bank created an extra contingent provision of INR5.25b and holds INR15.25b of contingency buffer as of Sep’24. The restructured book declined 5bp QoQ to 0.3%.

Highlights from the management commentary

Gross Slippage Breakup:

VF stood at INR6.92b, MFI at INR3.98b, Corporate at INR1.18b, and Other Retail at INR5.9b

* The bank is cautiously optimistic about the loan growth and its own portfolio and will accelerate growth as the credit environment improves.

* Movement in NIMs will depend on the high-yielding and unsecured part of the book. On the other hand, deposits grew at a faster rate and, hence, led to a reduction in the CD ratio.

Valuation and view

IIB reported a weak quarter, characterized by higher provisions (amid the creation of a contingency buffer of INR5.25b), lower other income, and slower growth in higher-yielding loan growth. However, deposit growth was healthy, led by term deposits. NIM contracted sharply amid the rising cost and slower growth in higheryielding assets. Asset quality ratios deteriorated marginally as fresh slippages continued to be elevated, primarily from the consumer finance book. IIB had previously guided for loan growth of 18-22% for FY25. However, with the bank’s cautious view on unsecured growth, we estimate loan growth at 13%. The bank has indicated a credit cost of 110-130bp over 2HFY25, though it does not plan to use its contingent provision (INR15b). While the MF and Card businesses may continue to report some stress in the near term, overall slippages are likely to remain in control and help maintain broadly stable asset quality. We cut our earnings estimates by 16.7%/8.7% for FY25/26, leading to an RoA/RoE of 1.6%/13.6% by FY26. Reiterate BUY with a TP of INR1,500 (premised on 1.5x FY26E ABV). Progression on asset quality (MFI business) and RBI approval for a fresh term to MD & CEO remain key near-term events to watch for.

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