Buy IndusInd Bank

IndusInd Bank (IIB IN) OW: 1Q FY13 – Firmly holding its ground

Growth and profitability remain intact despite continued tough macro conditions

NIM outlook improving with rates starting to soften; loan growth and asset quality trends to remain impressive

Reiterate OW and PE-, PB- and EPM-based TP of INR401

1Q FY13 earnings did not surprise us much, coming in at INR 2.36bn (31% y-o-y growth), in line with our estimate. Most of the parameters remained stable, including loan growth, fee growth, costs and asset quality, except for NIM, which was slightly weak given the continuing tightness in rates in 1Q. The stock ended flat over previous close.

Key highlights: Loan growth remained healthy at 31% y-o-y, with growth continuing to be driven by the retail segment. The book is now evenly split between the corporate and retail segments. The commercial vehicle (CV) segment continued to show resilience, up 44% y-o-y despite weaker CV industry growth as it gained further market share in new CVs and used CV segment growth. Deposit growth picked up this quarter, with savings account (SA) deposits growing 59% y-o-y, aiding current account, saving account (CASA) growth (CASA ratio of c28%). However, given the tight monetary conditions, funding costs rose by 35bp versus a 27bp rise in yields, leading to a small decline of 7bp q-o-q in margins, to 3.22%. Broadly, over the past three quarters, margins have remained fairly stable at c3.25%. Fee income continued its trend of outgrowing the loan book, up 44% y-o-y, helping to offset the margin pressure. Robust asset quality, with gross non-performing loans (GNPL) at 0.97% and zero additions to the restructured book (restructured advances at 24bp) was the major positive especially given the tough macro economic environment domestically.

Earnings outlook: With rates starting to soften in the past few days due to easing liquidity, we expect IndusInd Bank to start gaining margin momentum again, given that 45% of its loan book is fixed rate. The outlook on other key parameters, such as loan growth and asset quality, remains stable. We fine-tune our estimates by -2.2% for FY13 and by -4.5% for FY14, and we introduce FY15 estimates with this report.

Valuations: IndusInd Bank trades at 12-month forward multiples of 2.8x PB and 13.6x PE. With IndusInd Bank’s fundamentals still impressive in the current tough macro environment and given IndusInd Bank’s strong top management, we keep our 12-month target PE at 15x and PB at 3x, for an unchanged target price of INR401. We reiterate our Overweight on the stock and believe that IndusInd Bank’s superior growth, asset quality and profitability profile will support its premium multiples. Key downside risks are macro headwinds and higher-than expected slippages and credit costs.