Indusind Bank - The risks remain... - Q4FY20 Result Review - HDFC Securities

IIB's 4QFY20 net earnings (-76.8% QoQ) were below estimates (-20%), due to higher provisions. The rise in GNPAs was limited by higher w/os. Sequential NIM improvement was a positive surprise. Maintain ADD with a TP of Rs 575 (1xMar-22E ABV of Rs 575).

GNPA (2.45%) growth was optically curtailed to 12.4% QoQ, by higher write-offs (Rs 8.4bn) even as slippages (Rs 20.6bn) remained elevated at 3.97% (vs. 0.68% SMA II in 3QFY20). Slippages were chunky, with 4 a/cs (power and paper mfg. co., tea co., med. equip. co. and broker) contributing to ~60% of gross slippages. The management expects an 80bps COVID-19 GNPA impact. We remain cautious on the bank's asset quality given that existing stress (largely chunky) can materialise from its exposure to sectors perceived as risky (microfin., telecom, NBFCs, gems & jewellery, CRE etc.). We model slippages of ~3.5% over FY21-22E.

Concerns on funding granularity, but not liquidity: IIB saw a 6.8% QoQ fall in deposits (SA: -18.1%, TD: -3.5%). The events at YES resulted in this outflow (led by bulk and govt. deposits), although some of these deposits (largely wholesale) returned in Apr-20. Despite this, IIB maintained its LCR above 100% (112.3% terminal). Liquidity is not a concern, but IIB's reliance on borrowings (19.8% of assets, +280/450bps QoQ) has increased. Retail deposits are just ~31% (+300bps QoQ) - deposit granularity remains a concern. The mgt explicitly highlighted the need to focus on this. We believe IIB is likely to recalibrate its funding strategy and deposit growth may thus remain slow, posing an additional challenge to loan growth.

Loan growth: IIB's loan book was flat QoQ in the face of liability-side challenges and external headwinds. CCB loans (44.2% of loans) saw broadbased QoQ de-growth (-4.1%), accentuated by sell-downs. Interestingly, micro-credit (14% of loans, +16.7% QoQ) a/c for the entire QoQ growth in CFD loans as most other sub-segments witnessed de-growth. Growth at IIB will be restricted by COVID-19 related disruptions and liability-side recalibration. We expect loans to grow at ~9% over FY21-22E.

IIB may face serious near-term challenges- (1) asset quality risks stemming from its exposure to risky sectors (microfin., telecom, NBFCs, CRE etc.) and (2) scaling its granular deposit base. Higher provisions on anticipated stress will dent RoE. Together with heightened systemic risk, these underpin our measly assigned multiple (1x FY22E ABV).

Shares of INDUSIND BANK LTD. was last trading in BSE at Rs.470.6 as compared to the previous close of Rs. 468.9. The total number of shares traded during the day was 2127016 in over 45075 trades.

The stock hit an intraday high of Rs. 489 and intraday low of 443.3. The net turnover during the day was Rs. 996476056.

Source : Equity Bulls

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