IndusInd Bank - Q4FY18 Results Update - Operating Performance Remains Healthy

IndusInd Bank continued to deliver a healthy performance across operational parameters in 4QFY18 and FY18 albeit with minor setback on asset quality front. In line with our estimate, its net profit grew by 26.8% YoY and 1.8% QoQ to Rs9.5bn led by higher NII of Rs20.1bn (+20.4% YoY and +6% QoQ). Loan book grew by 28.2% YoY and 12.8% QoQ owing to strong growth in CV loan book and healthy growth in corporate loan book. While NIMs at 4% appear to be superior, C/I ratio at 45% is considered to be best-in-class. Savings bank deposit grew by a whopping 70% despite the base impact of demonetization in 4QFY17 leading to further improvement in CASA ratio to 44% as of Mar’18-end. On the flip side, the Bank has negatively surprised on asset quality front led by substantially higher divergence as suggested by the RBI in Annual Supervision Audit for FY17. It has reported a divergence of Rs13.6bn on gross NPA front in the RBI review, out of which only 14% (Rs1.9bn) slipped into NPA, while the remaining got either resolved or sold. Further, its overall stressed assets ratio has reduced to 1.23% in Mar’18 from 1.31% in Dec’17 and 1.30% in Mar’17.

Key Highlights for 2QFY18

• IndusInd Bank has 5.2% exposure towards gems and jewelry segment, the major chunk of which is lent to diamond cutting and polishing players. However, the Bank does not see any major impact on asset quality in the wake of the recent detection of fraud by few gems and jewelry players. Further, classifying 1 account as fraud (which is under investigation by different agencies), the Bank has adequately provided for the same.

• We expect the merger of Bharat Financial Inclusion to complete by 1HFY19E. Financially, the merger is likely to release capital (due to lower risk weight on MFI loan in Bank’s book), which may in turn boost earning profile and growth prospects.

• Credit cost stood at 62bps for FY18 and the Management expects it to bring down further to 55bps in FY19.

• The Management expects organic growth in loan book (excluding BFIL) to remain at ~25% in FY19.  Further, it expects NIMs to remain stable, going forward despite an increase in overall interest rate in the system due to improved ALM mix.

Outlook & Valuation

Acquisition of Bharat Financial Inclusion has placed IndusInd Bank in a sweet spot. With access to the best-in-class microfinance business network along with scale and profitability, we envisage significant upside potential in terms of loan growth, fee income generation and CASA mobilization, going forward. Further, recent changes in branch licensing and PSL certificate trading norms by the RBI will also help the Bank to achieve the synergy at a faster pace. We believe the Bank’s premium multiples are likely to improve further considering the strong growth and operating leverage across businesses. We expect the Bank’s earnings to witness 33% CAGR through FY18-20E. Rolling over our estimates to FY20E, we reiterate our BUY recommendation on the stock with a revised Target Price of Rs2,196  based on 4.3x FY20E Adjusted book value.

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