1. 28 December 2012
Update | Sector: Financials
IndusInd Bank
BSE SENSEX
S&P CNX
19,324
5,870
CMP: INR416
TP: INR500
Buy
Leveraging niche presence, fuelled with capital
Upgrading FY14 EPS estimate by 8%; 20% upside
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel.Perf.(%)
M.Cap. (INR b)
M.Cap. (USD b)
IIB IN
521.8
436/222
3/12/52
217.1
3.9
Valuation summary (INR b)
Y/E March
2013E 2014E 2015E
NII (INR b)
21.9 28.5 35.4
OP (INR b)
18.5 24.5 30.9
NP (INR b)
10.5 13.7 17.2
EPS (INR)
20.1 26.3 32.9
EPS Gr. (%)
17.4 30.5 25.2
BV/Sh. (INR) 142.2 164.7 192.8
ROE (%)
17.6 17.1 18.4
ROA (%)
1.7
1.8
1.8
P/E (x)
20.7 15.8 12.6
P/BV (x)
2.9
2.5
2.2
Business growth remains strong and asset quality stable. We model in FY12-15 loan
CAGR of 25%+ and credit cost of ~70bp.
Expect 2HFY13 margin to improve ~40bp+ over 1HFY13; FY14 margin to further
improve 20bp YoY on the back of capital raising and higher CASA ratio.
Addition of new products and deeper penetration of existing fee businesses led to
strong growth in fee income. As a result fee income to average assets has improved
from 1.3% in FY09 to 1.8% in FY12. Expect healthy growth to continue.
Recent capital infusion of INR20b will improve Tier 1 capital to 15%+ (highest amongst
private banks), sufficient to fuel growth for the next three years.
We upgrade our FY14 EPS estimate by 8%+ to factor in higher margins. Maintain Buy
with a revised target price of INR500 (3x FY14BV), 20% upside.
Growth and asset quality remains strong
IIB continues to enjoy strong growth (35%+ CAGR over last three years) and
superior asset quality (GNPA of 0.8%) in CV loans (24% of total book), despite
sector slowdown. The underlying success factors are: (1) strong credit appraisal,
(2) high repeat business, and (3) focus on the lower-stress SRTO segment (small
road transport operators). In corporate loans segment, IIB's asset quality is helped
by (1) diversified loan book, and (2) low proportion of term/unsecured loans.
Management is confident of maintaining healthy loan growth of 25-30% and
superior asset quality (which would keep credit cost under control).
Shareholding pattern %
5-Dec-12 Sep-12 Jun-12
Promoter
17.4
19.4
19.4
Foreign
36.6
34.3
34.2
9.3
8.8
8.7
36.7
37.6
37.7
Dom. Inst
Others
Stock performance (1 year)
Expect margins to improve gradually
We expect IIB to be a key beneficiary of likely reversal in interest rate cycle in
4QFY13 - high-cost deposits will be re-priced at a lower rate, whereas higher
mix of fixed rate loans (~50% of overall) implies lower decline in yields. Further,
improving CASA ratio and recent capital infusion of INR20b would help margin
expansion. Expect 2HFY13 margin to improve ~40bp+ over 1HFY13; FY14 margin
to further improve 20bp YoY on the back of capital raising and higher CASA ratio.
Strong traction in new customers continues; positive for CASA, fees
Rapid branch expansion (to 441 from 210 in FY10), product innovation and higher
interest rate on savings deposits has led to 75%+ increase in new customers
(average of 0.08m in FY11 v/s 1.45m in 2HFY13). This is positive for CASA and fee
income generation through cross selling of third party products.
FY14 EPS estimate up 8%, revised target price to INR500
Investors are advised to refer
through disclosures made at the end
of the Research Report.
We upgrade IIB's FY14 EPS by 8% to factor in higher margins. Our comfort with IIB
is based on: (1) Strong capitalization (15%+ Tier I post 10% equity dilution), (2)
Healthy business growth (25%+), (3) Margin expansion, and (4) Healthy asset
quality outlook. Maintain Buy with a revised target price of INR500 (3x FY14BVE),
20% upside.
Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); + 91 22 3982 5415
Sohail Halai (Sohail.Halai@motilaloswal.com) +91 22 3982 5430
2. IndusInd Bank
Growth continues to be strong; Retail traction holding on well
Management expects
medium-term loan
growth to be 25-30%
IIB continues to demonstrate strong growth in both its segments - consumer finance
(39% CAGR over FY09-12) and corporate finance (24% CAGR). Strong growth in consumer
finance segment in last two years has led to its share rising to 52% of loan book as
compared to 40.4% in FY10. Management expects medium-term loan growth to be
25-30% (more skewed towards lower end in challenging macro-environment) with
share of consumer finance expected to be in the range of 48-52% in near term.
Loan growth continues to be above industry average
Share of consumer financing on the rise (%)
While corporate finance book grew at a CAGR of 24% in last three years consumer finance reported a CAGR of 39% resulting in
higher incremental share of consumer financing in overall loans
Source: Company, MOSL
Asset quality healthy; Factoring higher credit cost, positive surprise likely
Earnings impact is likely
to be limited as
expansion of NIM would
support return ratios.
Factoring higher credit cost...
IIB's robust loan growth is coupled with healthy asset quality performance (GNPA of
1%/1.1% and NNPA of 0.3% in both corporate finance and consumer finance division).
Management is confident of maintaining healthy asset quality which would help
contain credit cost (even post accounting for one large stress account of INR1b in
media sector). We model slippage ratio to rise to average of 1.7% over FY13-15 (1.1%
in FY12) and credit costs to increase to 0.7% (0.47% in FY12). However, earnings impact
is likely to be limited as expansion of NIM would support return ratios.
… however higher margins would provide cushion
Even as we factor in credit cost to rise from 45bp in FY12 to average of 70bp over FY13/15, risk adjusted margin would improve,
led by sharp improvement in NIMs
Source: Company, MOSL
28 December 2012
2
3. IndusInd Bank
CVs: A key driver for consumer finance; asset quality holding up well
CV loans make up ~24% of IIB's overall portfolio and ~50% of its consumer finance
portfolio. Despite slowdown in the CV sector, IIB continues to report strong loan
growth (CAGR 35%+ over last three years) with good asset quality (GNPA of ~0.8%
v/s ~1.5% in FY10). Management attributes this success to (1) its domain expertise, (2)
strong credit appraisal, (3) higher amount of repeat business, (4) lower exposure to
mining segment, and (5) presence in SRTO segment (small road transport operators).
Our interactions with various participants also suggests that while stress has increased
for large fleet operators and first-time users, SRTOs are still better off due to their
higher flexibility in deploying vehicles.
Performance in CV segment continues to be healthy (%)
Healthy loan growth is
coupled with continuous
decline in NPA - an all
round improvement
Source: Company, MOSL
Rising focus on used vehicles segment: IIB has also increased focus on used vehicle
segment which now forms less than 25% of CV portfolio i.e. 5%+ of overall loans.
Incrementally, used CV forms about 13% of overall disbursement, which would also
be beneficial for margins (yields on used CVs is 16-17% v/s 14% for new CVs). IIB
focuses on existing customers with strong track record to grow its used CV portfolio,
thereby lowering asset quality risk and raising risk-adjusted margins.
Leveraging on its franchise: New product addition showing better than
expected growth
IIB has increased its focus on loan against property (LAP) where yields are in the range
of 12-13%. Management would be targeting professionals and businessmen in this
segment, and intends to grow its portfolio from INR10b in 2HFY13 to INR45-50b by
FY14. It also disburses home loan products for HDFC, wherein it earns commission of
90bp and cross selling fees of 30-50bp. Further, led by differentiated strategy credit
card business is also yielding strong earnings.
28 December 2012
3
4. IndusInd Bank
Consumer finance portfolio continues to be strong
CV portfolio dominating consumer finance segment (%)
Consumer financing growth continues to remain strong, focus to increase on used CV vehicle and LAP
Source: Company, MOSL
Slippages on consumer finance book contained
On back of healthy asset
quality performance IIB
continue to increase its
PCR on its consumer
finance portfolio despite
high percentage of book
being backed by security
Source: Company, MOSL
Consumer finance segment: Asset quality exhibiting an improving trend across segments
3QFY10
GNPA (%)
CV
Utility
CE
3W
2W
Cars
NNPA (%)
CV
Utility
CE
3W
2W
Cars
4QFY10
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
1.89
1.18
1.92
0.37
5.24
4.76
1.49
1.10
1.62
0.37
5.19
3.17
1.38
1.17
1.50
1.14
5.34
3.36
1.39
0.95
1.67
0.61
5.62
2.74
1.45
1.05
1.60
0.53
4.51
2.16
1.17
1.08
1.37
0.62
3.77
1.58
1.06
1.54
1.44
1.08
3.73
1.41
1.06
1.58
1.51
0.97
3.77
1.24
1.07
1.43
1.31
1.08
3.74
1.17
1.00
1.31
1.22
0.95
3.32
0.99
0.71
0.92
0.99
0.81
3.47
0.76
0.75
0.86
0.84
0.90
3.36
0.71
1.40
0.77
1.61
0.29
4.08
3.59
0.84
0.64
1.23
0.29
3.85
2.69
0.64
0.77
0.78
0.94
2.39
1.58
0.67
0.56
0.84
0.45
2.62
1.19
0.69
0.62
0.73
0.36
1.94
0.81
0.43
0.48
0.48
0.43
1.38
0.55
0.31
0.80
0.60
0.79
1.55
0.79
0.33
0.85
0.66
0.72
1.69
0.38
0.40
0.35
0.58
0.66
1.77
0.37
0.36
0.34
0.46
0.56
1.45
0.29
Source:
0.20
0.17
0.15
0.14
0.31
0.09
0.45
0.56
1.44
1.43
0.19
0.19
Company, MOSL
28 December 2012
4
5. IndusInd Bank
Corporate finance: Growth strong; higher proportion of working capital finance
In the corporate finance segment, IIB continues to be a working capital financier, with
low share of project loans (especially in infrastructure segment) vis-à-vis some of its
peers. The growth in corporate portfolio is on two counts: (1) continued acquisition
of new clients, and (2) increased working capital demand.
IIB's corporate portfolio at the end of 2QFY13 stood at INR190b, post adjustment for
sell-downs of INR25-30b which it resorts to every quarter for better management of
yields and margins. The bank is confident that its current strategy would lead to
healthy business growth in the near term.
Growth in corporate finance book remains healthy
Diversified corporate finance portfolio (%)
Diversified loan portfolio; Corporate loan growth moderates but should be seen in the context of bank resorting to sell-down
of INR25-30b per quarter to manage yields
Source: Company, MOSL
Healthy asset quality performance in challenging times
In terms of asset quality IIB has been able to deliver strong asset quality performance
with average slippage ratio being contained at 0.8% and credit cost at 0.4%. Diversified
loan book (major sectors <4% of overall e.g. power just 2.4%), exposure to high-rated
companies, and lower proportion of unsecured loan have combined to help IIB
maintain its asset quality even during the downturn. The management believes its
strong and improving core operations will enable it to absorb corporate-specific risks.
Asset quality in CCB though volatile remains manageable
(%)
Corporate specific risk to remain but overall asset quality will remain manageable
Source: Company, MOSL
28 December 2012
5
6. IndusInd Bank
Improvement in margins on the cards
Reversal of intrest rate,
higher share of fixed rate
loans and recent capital
infusion would boost
margins
Since 3QFY11, IIB's margins declined over 35bp+ to 3.25% led by increase in cost of
funds (+200bp). While yields on corporate loan portfolio increased 235bp+, higher
share of fixed rate loans restricted overall yield improvement to just 160bp and thus
impacted margins negatively.
The above scenario is likely to reverse in the expected falling interest rate regime
(wherein wholesale deposit rates cool off), and we expect IIB to be a key beneficiary.
Margins are expected to improve as almost 50% of the loan book is fixed in nature
with duration of more than one year. Even though on the corporate side, loans yields
are expected to decline, overall loan yields will likely fall to a lesser extent. Further,
improving liability profile and recently raised equity of INR20b (positive impact of
40bp) would boost NIM. We factor in margin improvement of ~40bp in 2HFY13 over
1HFY13 and further 20bp+ YoY for FY14.
Spread in consumer finance portfolio largely stable (%)
As a result margin continued to decline
With reversal in interest rate cost of deposits is likely to ease whereas yields on consumer finance portfolio is expected to
be sticking and help margin up-tick
Source: Company, MOSL
Strong traction in new customers continues; positive for CASA, fee income
Differentiated product offerings, high interest rate on saving deposit rate, and rapid
branch expansion have led to strong traction in new customers for IIB. In 1HFY13,
average quarterly run-rate of new customers was 0.14m v/s 0.08m in FY11. This has
helped IIB's high growth in savings deposits (61% post savings rate deregulation);
savings deposits share has increased to 11.1% of overall from 8.6% in FY11. (In 2QFY13,
savings deposit growth however moderated led by withdrawal by some high value
deposit customers.)
Management mentioned that the traction in new customer addition remains robust
and savings deposit growth is also likely to improve. On the other hand, traction in
current account (CA) deposit remains strong (+32% CAGR over FY09-12; share of CA
deposit in overall deposits is highest among peers). We expect CASA ratio to improve
to 31% by FY15 v/s 27% in FY12.
28 December 2012
6
7. IndusInd Bank
Traction in new customer addition remains strong
Branch network continues to increase at a rapid pace
SA deposit has grown by 60%+ post de-regulation of SA deposit rates; new to bank customers to ensure strong growth in future
CASA ratio improves led by SA deposits (%)
CASA per branch low as compared to peers (INR m)
CA per branch is next best to AXSB, and with maturing branch network and strong customer addition expect SA per branch to
improve as well providing boost to CASA deposits
Fee income growing strongly
Even as new customer acquisition is showing good traction, retaining and higher
cross-sell is a key focus area of the bank. Addition of new products and deeper
penetration of existing fee businesses led to strong growth in fee income. Fee income
to average assets increased to 1.8% in FY12 v/s 1.3% in FY09. While challenging
environment (e.g. slowdown in corporate fees) would moderate overall fee income,
opportunities to cross-sell and rapid addition of new customers would provide some
cushion. Management continues to guide for fee income growth to be faster than
balance sheet growth. We model in fee income CAGR of 27% through FY15 with fee
income to average assets of ~2%.
Fee income growth expected to remain healthy
Fee income to average assets one of the best in the industry
Source: Company, MOSL
28 December 2012
7
8. IndusInd Bank
Strong capitalization sufficient for next three years' growth
IIB has recently raised fresh equity capital to the tune of INR20b (at 2.8x post issue
BV). Following this capital infusion, promoters' holding has fallen to ~17% (which
needs to be reduced to 10% as per RBI's existing guidelines; how this will be done is
unclear for now). A combination of ESOP dilution (~7% of pre-dilution equity) and
possibility of RBI to keep promoter ownership in line with the banking amendment
bill should however is positive.
Tier I ratio has improved to 15%+ which would suffice for next three years of growth.
Our calculations suggest that post-capital raising, FY13 BV is up ~24%, and FY14E BV up
19%. While RoAs will remain strong at 1.7%+, RoE would fall to 17% from the current
level of 20%+, before gradually picking up on back of increasing leverage.
Strong capitalization - armed for strong growth (%)
Source: Company, MOSL
Valuation and view: Upgrading FY14 EPS 8%, Buy
We upgrade our FY14 EPS estimate by 8% to factor in higher margins (+20bp).
Superior margins, focused fee income strategy and control over C/I ratio will keep
core operating profitability strong.
Improving liability franchise, structural improvement in RoA, and 25%+ asset
growth should help IIB to post one of the highest PAT CAGR (28%) among the
banks under our coverage.
While asset quality remains strong, we model higher credit cost of 70bp over
FY13-15 v/s 45bp in FY12, to factor in possible rise in delinquency. However, levers
for margin improvement and strong fee income growth will keep RoAs strong at
1.7%+ over FY13-15.
Maintain Buy with a revised target price of INR500 (3x FY14E BV).
28 December 2012
8
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IndusInd Bank
No
No
No
No
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