Buy IndusInd Bank; target of Rs 650: ICICIdirect

“IndusInd Bank (IIB) reported a healthy quarter. NII (Rs 801 crore, up 18% YoY), PAT (Rs 421 crore, up 25.7% YoY) & asset quality (GNPA ratio stable QoQ at 1.11%) were in-line with estimate. However, NIMs came in below expectation at 3.66% (down 9 bps QoQ) vs. 3.75% estimated owing to strong traction of 38% YoY in the lower yielding corporate portfolio (57% of the total credit now). Overall credit traction was healthy at 23.7% YoY to Rs 58664 crore while deposit growth was slightly above expectation at 14.8% YoY to Rs 63893 crore. CASA ratio improved to 33.3% vs. 32.5% in Q4FY14. Strong fee income (83% of total other income) growth of 38.5% YoY to Rs 487 crore was the other key highlight of the result.”

“The current management after taking over in early 2008 has transformed IndusInd Bank (IIB) from low and volatile B/S growth to steady and sustainable growth with strong profitability. We like the fact that the transformation has been a qualitative one (RoA up from 0.3% to 1.8% as on FY14) despite the turbulent economic scenario. The loans, deposits & PAT traction improved to 28%, 21% & 63% CAGR, respectively, over FY08-14 from 12%, 13% and -35% during FY05-08. The loan & deposit base, as on Q1FY15, stands at Rs 58664 crore and Rs 63893 crore, respectively. Going ahead, considering the current weak economic outlook, the traction will moderate from past trends but remains ahead of the industry. We have factored in loan & deposit CAGR of 21% over FY14- 16E while PAT is estimated to increase at 24% CAGR to Rs 2180 crore.”

“IIB has fared well over the years in terms of asset quality with GNPA ratio improving from 3.1% in FY08 to 1% by FY11 and has stayed at around these levels currently. The steady performance on the asset quality front is owing to IIB’s peculiar loan mix. The asset book is evenly divided between consumer finance (CF) (~80% of which is the high vehicle financing) and corporate banking (CB) (working capital in nature & well diversified across industries). Though concerns are being raised about CV portfolio (17% of the total book), there has been no drastic deterioration yet. Going ahead, we expect a slight rise in slippages and expect the GNPA ratio to rise to 1.2% (Rs 788 crore) by FY15E.”

“Despite our factoring in a moderation in asset growth coupled with largely flat margins and a rise in credit cost, our earnings estimate for IIB is healthy at 24% CAGR over FY14-16E. Expected return ratios of ~18% RoE & ~1.8% RoA provide comfort. We believe any major improvement in margins & loan growth (especially post Q2FY15E as guided by management) could lead to higher than expected growth in PAT. We maintain BUY with a target price of Rs 650,” says ICICIdirect.com research report.

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