Reduce IndusInd Bank Ltd for the Target Rs.700 by Emkay Global Financial Services Ltd
After a challenging Q4FY25 marked by recognition of derivative discrepancies/ MFI NPAs and resignation of the entire top management team, IndusInd Bank turned profitable in Q1FY26 with PAT at Rs6bn (Emkay: Rs2bn), on higher NII (incl higher interest on IT refund), treasury gains, and lower provisions. Asset quality though remains weak, with GNPA ratio inching up by 51bps QoQ given stress across segments, incl MFI. The interim leadership (COE) is rehauling the treasury management system, has sharply cut SA rates, and targets single-digit opex growth for driving profitability. Factoring in the Q1 beat and slower opex, we revise up FY26E-28E earnings by 2%-9% and our TP by ~8% to Rs700, rolling forward on 0.9x Jun-27E ABV. However, we retain REDUCE. We believe it is prudent to wait for the new MD & CEO to allay the risk of further kitchensinking and articulate a LT strategy – particularly fixing its retail liability franchise, asset portfolio mix, risk management, and senior management team
Weak business growth; await appointment of new MD & CEO IIB’s loan book declined further, by 4% YoY/3% QoQ mainly due to sell-off of corporate loans and sequential decline in the consumer business segment (down ~1%) as MFI stress persists. Deposits too declined, by 3% QoQ as the bank shed high-cost deposits, while CASA deposits fell at a higher pace (down 7% QoQ) due to a drop in CA deposits, as also in SA deposits (as the bank cut SA rate aggressively). Reported NIM declined by 79bps YoY, albeit but rose by 121bps QoQ (incl a 11bps rise owing to one NPA recovery and interest on IT refund) to 3.5%, broadly in line with Q4 (adjusted for one-offs). The bank hinted at further deposit rate cuts to support margins in coming quarters. The IIB Chairman has given assurance that the bank has not rejigged the candidate list, as reported by the media, and expects the regulatory evaluation process to complete soon, paving the way for the appointment of the new MD & CEO.
Higher retail stress including MFI leads to GNPA ratio inching up Gross slippage is lower QoQ in 1Q, albeit still elevated at Rs25.7bn/6% of loans due to continued MFI stress (Rs8.9bn), VF (Rs7.4bn), and one lumpy corporate account (50% provided). This, along with lower write-offs given subdued operating profitability, pushed up GNPA/NNPA ratio by 51bps/17bps QoQ to 3.6%/1.1%. The interim management expects asset quality to gradually improve as MFI stress eases, though we believe caution is warranted amid rising stress in the CV portfolio (11% of the loan portfolio) across lenders and given potential risk of further cleanup by the new management.We retain REDUCE Though the capital/LCR situation is comfortable, it is prudent to wait for the new MD & CEO to allay any risk of further kitchen-sinking as well as to articulate a long term strategy – particularly fixing its retail liability franchise, asset portfolio mix, risk management, and senior management team. We retain REDUCE while raising our TP to Rs700 from Rs650 earlier. Key risk to our call: Appointment of a marquee private banker; faster than expected business/asset quality turnaround.
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