IndusInd Bank - Q4FY21 Result Update - ICICI Securities

Focus on scaling-up domains of expertise; journey to growth visible

FY21 has been the year of strengthening the franchise for IndusInd Bank with focus on accelerated and prudent provisioning, ramping up of a granular deposit base, reducing corporate exposure, and driving core fee income. As anticipated, restructuring at 2% of advances and credit cost at >3.7% were higher than private peers. However, GNPAs were contained at 2.67% and it kept building buffer against the stress pool (now carries 3.3% cumulative provisioning). Having recognised and provided for significant pool of stress, the focus going forward (besides healthy collections) would be to scale up and gain market share in domains of expertise (vehicle, MFI diamond financing), invest in new growth engines, sustain granularity in businesses and maintain deposit traction. FY21 will be an inflection point for change in trajectory towards delivering >5% PPoP/loans, >1.6% RoAs and 14% RoEs. Levers available for growth, NIMs and fee income further boosted confidence. We believe the stock is now due for re-rating towards 1.8x FY23E ABV. We upgrade the stock to BUY (from Add) with a revised target price of Rs1,260 (earlier: Rs1,013). Key risks: 1) Stress unfolding due to covid resurgence; and 2) credit cost not normalising soon.

- Stress adequately recognised on vulnerable pool coupled with restructuring: GNPAs settled lower at 2.67% compared to pro-forma GNPLs of 2.93% in Q3FY21 and net NPA managed at 0.7% (same as pro-foma NNPA as of Q3FY21). The bank reported slippages of Rs38.3bn of which Rs19.3bn (3.6% annualised run-rate) was business as usual and Rs19bn of OTR/technical slippages (out of which Rs16bn was upgraded in the quarter). OTR/technical slippages include Rs10.7bn of groups in retail and construction where the restructuring process was on as of Mar '21. Excluding technical slippages, slippage run-rate for the full fiscal FY21 falls in-line with expectations at ~3.2%.

Unsecured retail caused higher-than-expected stress at 8-9% (Rs3.83bn in Q4FY21 + Rs7.5bn in Q3FY21). MFI slippages were Rs3bn + Rs4.7bn (~3% of advances), vehicle finance at Rs6.87bn + Rs5bn (~2%), secured retail at Rs4.3bn + Rs3.2bn (3.6%). Corporate, excluding technical nature, was at Rs3.4bn (Rs3.8bn in Q3FY21). Besides, restructuring was invoked on 2% (1.8% pandemic-related) of the loans 1) vehicle loans constituted 65% (4% of advances), 2) non-vehicle retail at 17% (1.9% of the pool), and 3) balance 18% from corporate banking (0.8% of corporate advances). No restructuring was invoked in MFI segment.

- Carries 75bps buffer with 75% provisioning coverage on existing stress: Lending comfort on incremental stress are: 1) Corporate SMA-2 at 31bps; and 2) collection efficiency at 98% - though unsecured is lower than the average. Bank followed a conservative stance of creating buffer (credit cost of >370bps) and made 100% provision on unsecured, MFI, thereby, creating PCR of 75%. It now carries specific LLP of 1.6%, contingent provisions of 75bps (Rs16bn) and standard/general/other provisions of 0.6%. Evaluating the portfolio profile, we are building in slippages of 2.5%/2.0% and credit cost of 1.8%/1.4% over FY22E/FY23E, respectively.

- Scale-up domains of expertise and gain market share: Given accelerated deposit traction, surplus liquidity and tier-1 capital at 15.55%, IndusInd is well equipped to eye growth. Leveraging its domains of expertise, the bank will look up for growth opportunities in vehicle financing, MFI, and secured and better-rated corporates. Vehicle finance disbursements grew 30% YoY/8% QoQ led by CVs, UVs, tractors. In micro-finance industry, it has outpaced peers growing the portfolio by 9% YoY/15% QoQ. After conservatively providing for losses, it is more confident and comfortable on MFI segment than 6-9 months back. It will remain cautious on unsecured lending (will be contained below 5%) and 3-wheeler segment. Granularising the corporate portfolio and gaining confidence about its stability from limited stress flow-through + anticipated resolutions (3-4 accounts in the near term), it will now look to grow the corporate portfolio. The focus will be on gems & jewellery, supply chain, logistics, working capital for MNCs, etc. We estimate credit growth of 11%/17% for FY22E/FY23E, respectively.

- Fee income is more annuity and distribution-led: With an uptick in activity levels, fee income grew further by 9% QoQ (8% YoY). Loan processing fee grew 19% QoQ. PSLC income of Rs520mn supported general banking fees. Distribution fee is gaining momentum (up 8-9% QoQ/YoY), while investment banking fee continues to be volatile at Rs640mn. For full year FY22, fee income was down 19% over FY21.

- NIMs stayed put despite interest reversal: NIMs were flat QoQ at 4.13%. Excess liquidity had a drag on asset yields while advance yields were managed at 11.8% (consumer finance at 14.3% and corporate banking at 8.4%). Cost of funds too witnessed benefit of 19bps. With utilisation of excess liquidity and flexibility to reduce deposit rates, bank expects NIMs to be in 4.2-4.4% range.

- Robust QoQ traction in deposits continues: Deposit momentum still continues to be strong - 7% QoQ growth over and above 20% growth YTD till Dec '20, sustaining Q4FY21 YoY growth at 27% (albeit on a lower base - after witnessing a decline of 7% in Q4FY20). Proportion of retail and small business deposits as proportion of overall deposit is up >150 bps to 37.4% (from 35.9%/33.1%/31.9% for Q3FY21/Q2FY21/Q1FY21) and CASA ratio also improved 130bps to 41.7%. With strong deposit traction in FY21, bank now has enough flexibility on rate front and will look for further deposit rate cuts in a calibrated manner. It has resumed branch expansion (added 100 branches in Q4FY21) and targets to add 500 branches over the next 2 years.

- Planning cycle-5 strategy is being pursued: IndusInd will pursue its FY20-FY23 strategy of building scale with sustainability topping up its domains of expertise, investing in new growth engines, fortifying liabilities and leapfrogging into digital banking. Conservatism will be the undertone as reflected in C/D ratio being capped below 95%, unsecured retail assets will be contained below 5%, PCR upward of 65%, etc. 'Affluent and NRI' will be the focused segment for mobilising deposits (constituting >30% of incremental deposits). BFIL integration and doorstep banking will surge rural deposits. It will scale up its key domain areas that demonstrated higher risk-adjusted returns over cycles, namely vehicle finance, MFI, diamond financing, and new domains (affordable housing, SME, wealth management). The expected outcome of this strategy will be 15-18% asset growth, >5% operating profit as a percentage of loans, and RoAs upwards of 1.5%.

Shares of INDUSIND BANK LTD. was last trading in BSE at Rs.934.95 as compared to the previous close of Rs. 939. The total number of shares traded during the day was 285236 in over 7379 trades.

The stock hit an intraday high of Rs. 948 and intraday low of 915.1. The net turnover during the day was Rs. 267363229.

Source : Equity Bulls

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