Hold IndusInd Bank Ltd For Target Rs.780 by Prabhudas Liladhar Capital Ltd
Transition phase to be challenging
Quick Pointers:
* Miss on PAT due to lower fee income and weaker asset quality.
* Loan growth and asset quality to normalize from H2FY26.
IIB saw a weak quarter yet again since PAT was lower mainly led by sharp QoQ drop of 31% in fees and weaker asset quality. Fees was affected due to subdued corporate and MFI disbursals; while this may be considered as a new base, it is expected to pick-up. We are factoring fee to assets of 135bps in FY27 (earlier ~160bps). Opex is guided to grow in single digits led by lesser disbursals in MFI and muted loan growth in FY26E. Slippage ratio remained elevated at 298bps (normal run-rate ~200bps); slippages may stabilize from Q3/Q4FY26. IIB targets to keep NNPA at 50-60bps in long run (now 112bps). FY26E would be challenging since a clean-up is underway. Near to medium term performance would hinge on pedigree of the prospective CEO and the strategy to improve governance, credibility and fundamentals. Stock is trading at 0.9x on Mar’27 ABV; we maintain multiple at 0.9x and keep TP at Rs780. Retain HOLD.
* Weak quarter due to sharp drop in fees and higher provisions : NII was higher at Rs46.4bn (PLe Rs45bn); NIM (calc.) adjusted for IT refund and one-time recovery of 11bps was a slight miss at 3.57% (PLe 3.61%). Loans and deposits accretion was largely in-line at -4.1% YoY and -0.3% YoY. CASA ratio fell to 31.5% (32.8% in Q4’25). LDR stable at 84% (83.9% in Q4FY25). Other income was lower at Rs21.6bn (PLe Rs24.1bn) due to 31% QoQ fall in fees to Rs15.3bn. Opex at Rs41.4bn was a tad higher by 1.2% due to more staff cost partly offset by lower other opex. Core PPoP at Rs20.3bn was 23% below PLe; PPoP was Rs26.5bn (PLe Rs28.1bn). Asset quality worsened as GNPA was 3.64% (PLe 3.35%) due to higher net slippages and QoQ fall in loans. Hence provisions were a drag at Rs17.4bn (PLe Rs14bn). Core PAT turned positive to Rs2.2bn; while PAT was Rs6.8bn (PLe Rs10.6bn).
* FY26 could see muted loan growth: Loans de-grew by 3.3% QoQ driven by ~8.0% fall each in corporate and MFI; consumer finance was flat QoQ. While loan growth is likely to be muted in FY26E (we are factoring 3.0% YoY) which would impact NII, SA/TD cut of 200bps and 100bps would cushion NIM. Benefit of SA rate cut is yet to be fully reflected in cost of deposits while there is further scope for deposit rate cuts. Fee income was weak due to subdued corporate/MFI disbursals and it declined to 115bps from 173bps in Q4FY25. As per IIB while this may be considered as a new base, it is expected to pick-up. We are factoring fee/assets of 124/135bps for FY26/27E (167bps in FY24).
* Asset quality remains under pressure: Opex is guided to grow in single digits driven by (1) lower variable cost (2) lesser disbursal related expenses in MFI segment and (3) benefits of technology and operating leverage. Slippage ratio remained elevated at 298bps (normal 200bps); split was: MFI Rs8.9bn, vehicle Rs7.4bn, other retail Rs6.92bn and corporate Rs2.45bn. MFI stress would take at least 6 months to normalize and overall slippages are expected to stabilize from Q3/Q4FY26. Bank targets to keep NNPA at 50-60bps in the long run.
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