IndusInd Bank - Secular growth story - Antique

Advances growth to slowdown marginally

IndusInd Bank's advances growth continued to remain healthy in the 25-30% range for several quarters. However, prolonged weakness in the economic environment accompanied with tightening in the monetary policy stance would limit the bank's ability to keep up with the current pace of growth. The bank's consumer finance division comprising mainly of loans to commercial vehicle and utility vehicle segment have begun to show signs of slowdown. However, demand may revive in the rural areas owing to good monsoons. Growth in corporate loan book is expected to taper down as borrowings from mid-corporates have started diminishing. In FY14e, the management expects loan book to grow in the 23-25% range.

NIM to see marginal pressure, but to remain above 3.25% in FY14e

The bank's deposit profile comprises higher proportion of wholesale deposits (~45-50% of deposits). Given the increase in short-term rates in 2QFY14 coupled with tighter liquidity situation, there may be some spillover impact on margins for 3QFY14. On the assets front, the consumer loan book, which constitutes ~50% of advances, is largely a fixed rate book, which would not get re-priced. However, the management expects 80% of corporate loan book (50% of loan book) to get re-priced upwards. Consequently, overall NIM may see some contraction in 2HFY14e. The management expects NIM to hover ~3.3% in FY14e.

Growth in core fee income to decline marginally

Core fee income grew at a healthy 36% in FY13. In the current year, the bank is likely to face slowdown in distribution-based fee income, led by insurance business. Nevertheless, forexbased fee income is expected to maintain growth momentum, owing to addition in its retail customer base, due to branch expansion coupled with further penetration into existing wholesale clients. We expect core fee income to grow 20-22% in FY14e.

Stress in asset quality to remain controllable

Asset quality continues to remain manageable with gross and net NPA at 1.1% and 0.2%, respectively, and provision coverage ratio of 80% (inclusive of INR500m floating provision). The management envisages some stress stemming in mid-corporate loans and has added more borrowers to its watch list. In the CV segment, the bank is experiencing some delays in payment, but the NPAs generated are more technical in nature. Overall in FY14e, the bank expects to restrict its credit cost to 60-65bps.

Valuation and outlook

IndusInd Bank continues to remain one of the best mid-sized private banks in India. It has a healthy capital adequacy ratio of 15.6%, with Tier I ratio of 13.5%, and is well positioned to maintain above industry growth. It has a NIM and CASA of over 3.5% and 30% levels, respectively. Despite a challenging environment, we expect earnings growth of 24% CAGR over FY13-FY15e. We continue to maintain our Buy recommendation on the stock with a target price of INR475 per share, based on 2.5x FY15e P/BV.

Source : Equity Bulls

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