IndusInd Bank - Earnings Above Expectations; TP Cut, Retain Hold - Nirmal Bang

IndusInd Bank posted net earnings of Rs3.3bn for 2QFY14 aided by a 37.3% YoY growth in net interest income (NII), loan book growth of 24.2% YoY and innovative interpretation of the Reserve Bank of India (RBI) guidelines on mark-to-market losses by providing only Rs163mn (in place of Rs382mn/quarter for the remaining three quarters of FY14). We believe that given the current weak macro-economic environment, the business outlook remains challenging for the bank but the reporting of lower non-performing assets (NPAs) indicates its immunity to the broader economic slowdown, which is quite strange. Factoring in these concerns we have revised upwards our provisioning estimates for FY14/FY15 by 32.7%/39.6%, respectively, and cut our earnings estimates for FY14/FY15 by 5.1% and 4.9%, respectively. We have cut our target price on the stock to Rs445 from Rs450 earlier, but retained our Hold rating on it.

Operational performance: IndusInd Bank posted 2QFY14 earnings of Rs3,302mn, up 31.9% YoY but down 1.4% QoQ, aided by YoY growth of 37.3% in NII, which was above our net profit estimate of Rs3,161mn by 4.5% and Bloomberg consensus estimate by 7.3%. It reported interest income growth of 16.8% YoY and 5.6% QoQ, while interest costs grew 8.2% YoY and 7.0% QoQ to fuel NII growth. NII showed a deviation of 6.6% from our estimate of Rs6,565mn. The bank reported a growth of 30% YoY, but a decline of 11.4% QoQ in non-interest income at Rs4,167mn versus our estimate of Rs4,159mn. Core fee income grew 32% YoY and 11% QoQ. Overheads rose 28.8% YoY and 4.0% QoQ at Rs5,288mn.

Margins slip sequentially: IndusInd Bank posted a decline of 7bps sequentially in margins at 3.65% in 2QFY14 compared to 3.25% in 2QFY13. A 21bps expansion in cost of funds and 11bps improvement in yields on advances contained the decline in margins. While the bank maintained less volatility in margins, with a movement of 10bps either way from the current levels, we have factored in margins at 3.4%-3.5% going forward. However, the bank has done well by tweaking its borrowings in order to have a capped impact on margins.

At the current market price, IndusInd Bank stock trades at 2.7x FY14E BV and 2.8x FY14E ABV. We believe that given the current weak macro-economic environment, the business outlook remains challenging for the bank but its sustained reporting of lower NPAs indicates immunity to the broader economic slowdown, which is quite strange. Factoring in these concerns, we have revised upwards our provisioning estimates for FY14/FY15 by 32.7%/39.6% respectively and cut our earnings estimates for FY14/FY15 by 5.1% and 4.9%, respectively. Consequently, our target price stands marginally reduced to Rs445 from Rs450 earlier. We have retained our Hold rating on the stock.

Source : Equity Bulls

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