According with Money control Research overviews IndusInd Bank (IIB CMP: Rs 976, Market cap: Rs 75,514 crore) has not only weathered the storm of toxic assets and run on its deposits that caused the shares to nosedive last year, but has also emerged from the crisis stronger as is evident from the way it has negotiated the deadly second wave of the pandemic. With almost all the parameters of earnings, business growth and asset quality surpassing expectations, the bank is all set to drive strong earnings growth, riding on its clear focus on granular retail-oriented deposit book, diversifying and granulating the asset book and maintaining adequate capital buffer. With an undemanding valuation of 1.4X P/AB of FY23e, we see immense headroom for re-rating given the much improved earnings quality and the right ingredients for growth.
Q1 FY22 Indusind Bank Result
The growth in net interest income (difference between interest income and interest expense) mimicked the credit growth with a marginal decline in interest margin despite steeper reduction in funding cost on account of interest reversal and excess liquidity in the balance sheet.
The year-on-year (YoY) growth in non-interest income was supported by a steady core fee income growth and QoQ (quarter on quarter) by trading gains. The cost-to-income ratio was stable and provision remained elevated on the recognition of upfront stress.
Asset quality — Much better amid the deadly second wave of the pandemic
Asset quality held up better than expected with reported gross NPA (GNPA) and net NPA (NNPA) at 2.88 per cent and 0.84 per cent respectively, a tad uptick over 2.67 per cent and 0.69 per cent, respectively, reported in the preceding quarter. The bank had an actual provision coverage (PCR) of 72 per cent. What is reassuring about IIB’s strategy is that it has conservatively provided 100 per cent against unsecured retail and MFI loans and the total loan-related provisions are at 123 per cent of the GNPA and 3.60 per cent of loans.
The bank also carries standard contingent provision of Rs 2050 crore (close to 1 per cent of loan) that is outside the PCR.
Of the actual Q1 slippage of Rs 2762 crore, which is lower than the Rs 3829 crore of gross slippage in Q4, 38 per cent was contributed by vehicles, 24 per cent by MFI, 23 per cent other retail and 15 per cent by corporate. The amount of restructuring at 2.7 per cent of advances, up from 2 per cent in March 21, looks higher than most peers. Of the incremental additions in the quarter, nearly half was from corporate restructuring already under implementation. While the SMA2 book (special mention accounts where principal or interest is overdue between 60 and 90 days) saw an uptick to 47 basis points from 31 basis points of advances in Q4, the good news is that after a temporary blip in April and May, collection efficiency improved to 96 per cent in June and got better in July. Should the momentum sustain, the management expects normalisation of credit cost in the range of 160-180 basis points.
With the asset quality picture much better than what it was during the first wave, the bank can now focus on growth, given that it has now got the right kind of liability in place.
The solid deposit base after the crisis of last year
IIB has seen a strong surge in deposits — YoY 26.5 per cent and 4.4 per cent sequentially. Its CASA (low cost Current & Savings) growth at 33 per cent YoY resulted in the CASA share improving to 42 per cent from 40 per cent in the year-ago quarter. The bank has been steadily dropping rates on deposits without seeing any reversal in flows and has managed to see a 76-basis-point reduction in the cost of deposits in the past year to less than 5 per cent now. It has reduced savings and term deposits rate by further 50 basis points in the quarter. The cautious approach in growing the book, however has resulted in a decline in the credit-to-deposit ratio to 79 per cent from 94 per cent in the year-ago period.
The steady decline in cost of funds and the high yielding retail book spell good news for interest margin, and as excess liquidity wanes with the return of growth, this should play out. The IIB management guided to a steady margin band of 4.15-4.25 per cent.
Loan book growth could accelerate
In line with the bank’s approach to improving underwriting standards and bringing more granularity to assets, the loan book growth has been tepid so far — YoY growth of 6.4 per cent and a sequential decline of 0.9 per cent in Q1 FY22. In the past year, MFI (microfinance) and mid corporates saw traction but the bank is now seeing opportunities in other areas as well. With the granularisation exercise largely over and the economy picking up pace, the bank expects growth in the range of 16-18 per cent in the next couple of years.
The decline in the ratio of risk weighted assets to total assets at 73 per cent from 82 per cent in the year-ago quarter stands testimony to the improved underwriting standards.
IIB’s comfortable Capital Adequacy at 17.89 per cent and CET1 at 15.92 per cent prepare the ground for a strong growth post Covid. The bank is optimistic in the areas where it has domain expertise — vehicle finance, gems & jewellery and micro finance.
Outlook Indusind share price
IIB so far has negotiated the second wave of the pandemic impressively. Armed with capital, excess provision and a high quality balance sheet with the right kind of liability, growth revival is only a matter of time. With an undemanding valuation we see more re-rating ahead.
Key risk: Future waves of Covid-19, impacting earnings and asset quality
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