IndusInd Bank BUY. Stable show; soft topline a temporary blip. 11 January 2018 India Private Sector Banks Company Update

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1 11 January 2018 India Private Sector Banks Company Update IndusInd Bank BUY Stable show; soft topline a temporary blip IIB s 3QFY18 profits grew 25% YoY and asset quality remained in fine fettle. However, core operating income growth was 20.6% YoY and slower than recent trends. While margins were maintained at 4%, overall asset growth was at 20% YoY (vs loan growth of 25% YoY) dragging NII growth lower. Slower opex growth meant that core PPoP growth was still robust at 26% YoY. Management also indicated that the Bhafin merger remains on-track as per earlier communicated timelines. We expect IIB to resume its topline momentum in the next couple of quarters and continue to like the name for its diversified portfolio mix, clean balance sheet and best-in-class profitability. Maintain BUY with TP of 2,120 (at 3.8x FY20E BVPS). Loan growth robust, corporate loans continue to outperform: Corporate loans were up 26% YoY, as against 23% YoY growth in retail loans. On the corporate front, management hinted at signs of a capex revival driving brownfield expansion in certain sectors. Working capital loans and flow-back of short-term financing from the bond markets also contributed to incremental corporate growth. In the retail segment, the vehicle finance book was up c.20% YoY, with robust growth in CV financing (up 23% YoY). Disbursement growth in the vehicle finance segment was strong (up 34% YoY) with robust growth in CV financing disbursements (up 39% YoY). Despite robust overall loan growth, RWA / Total Assets remains at c.80%, which gives comfort to asset quality and capital. Topline momentum a tad slower, margins intact: NII growth moderated to 20%YoY in 3QFY18, despite loan growth at 25% YoY. However, margins remained intact at 4% and the moderation in topline growth was primarily due to the base effect from the demonetisationled high base of 3QFY17 and withdrawal of excess liquidity in the system. Moreover, growth in overall interest earning assets moderated to 20% YoY, which also contributed to moderation in NII growth. Loan spreads reduced marginally (26bps QoQ), ostensibly due to increased competition in the retail segment. Asset quality stable, SMA2 less than 1%: Asset quality remained stable with a marginal improvement in the corporate rating profile. Moreover, SMA2 loans remain less that 1% of the overall loan book. Gross NPLs in the retail loan book too moderated sequentially by 9bps to 1.10%. Moderate growth in RWA (~80% of assets) also led to a 20bps sequential increase in capital adequacy. Sameer Bhise sameer.bhise@jmfl.com Tel: (91 22) Jayant Kharote jayant.kharote@jmfl.com Tel: (91 22) S Parameswaran s.parameswaran@jmfl.com Karan Singh CFA FRM karan.uberoi@jmfl.com Tel: (91 22) Nikhil Walecha nikhil.walecha@jmfl.com Tel: (91 22) Bunny Babjee bunny.babjee@jmfl.com Tel: (+91 22) Recommendation and Price Target Current Reco. BUY Previous Reco. BUY Current Price Target (12M) 2,120 Upside/(Downside) 24.7% Previous Price Target 2,120 Change 0.0% Key Data IIB IN Current Market Price Market cap (bn) INR1,700 INR1,019.8/US$16.0 Free Float 91% Shares in issue (mn) Diluted share (mn) 3-mon avg daily val (mn) INR2,322.0/US$ week range 1,818/1,185 Sensex/Nifty 34,503/10,651 INR/US$ 63.7 Price Performance % 1M 6M 12M Absolute Relative* * To the BSE Sensex Open to inorganic opportunities in non-lending segments: Management indicated that it is open to pursuing inorganic expansion opportunities in mutual fund, life and general insurance businesses. IIB currently only acts as a third-party distributor for MF and insurance products where it has achieved reasonable success. Valuations and view: We continue to like IIB given its positioning as a diversified play on rural economy (Bhafin), non-mortgage retail and select corporate segments, with superior profitability and strong execution. Maintain BUY. Financial Summary Source: Company data, JM Financial. Note: Valuations as of 11/Jan/2018 JM Financial Institutional Securities Limited (INR bn) Net Profit Net Profit (YoY) (%) Assets (YoY) (%) ROA (%) ROE (%) EPS EPS (YoY) (%) PE (x) BV BV (YoY) (%) P/BV (x) JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters S&P Capital IQ and FactSet Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification.

2 Key Quarterly trends Exhibit 1. IIB : Results summary Earnings Table (Rs mn) YoY (%) QoQ (%) NII 15,784 18,210 18, % 4.1% Fee based Income 7,055 8,300 8, % 5.4% Exchange Profits 1,793 1,830 2, % 10.4% Trading Profits 1,320 1,750 1, % -37.1% Misc Income #DIV/0! -44.2% Non-Interest income 10,168 11,876 11, % -0.1% Total Income 25,952 30,086 30, % 2.4% Employee Cost 3,940 4,450 4, % 3.4% Other Operating Expenses 8,378 9,300 9, % 2.9% Total Operating Expenses 12,319 13,751 14, % 3.0% Operating Profit 13,633 16,335 16, % 1.9% Loan Loss Provisions 1,524 2,220 1, % -15.8% Total Provisions 2,169 2,938 2, % -19.6% PBT 11,465 13,398 14, % 6.6% Tax 3,959 4,597 4, % 7.1% Reported Profit 7,506 8,801 9, % 6.4% Balance sheet (Rs bn) Deposits 1, , , % 3.3% Net Advances 1, , , % 4.4% Total Assets 1, , , % 2.9% Low-cost Deposits (%) 37.0% 42.0% 43.0% 6.0% 1.0% Loan-Deposit ratio (%) 86.2% 87.1% 88.0% 1.8% 0.9% Key Ratios Credit Quality Gross NPAs (Rs. mn.) 9,716 13,453 14, % 11.4% Net NPAs (Rs. mn.) 4,007 5,369 5, % 10.3% Gross NPA (%) 0.94% 1.08% 1.16% 0.22% 0.07% Net NPA (%) 0.39% 0.44% 0.46% 0.07% 0.02% Loan Loss Provisions (%) 0.66% 0.80% 0.65% -0.01% -0.15% Coverage Ratio (%) 58.8% 60.1% 60.5% 1.7% 0.4% Capital Adequacy Tier I (%) 14.74% 15.09% 15.33% 0.59% 0.24% CAR (%) 15.31% 15.63% 15.83% 0.52% 0.20% Du-pont Analysis NII / Assets (%) 3.93% 3.78% 3.83% -0.10% 0.05% Non-Interest Inc. / Assets (%) 2.53% 2.46% 2.40% -0.14% -0.06% Operating Cost / Assets (%) 3.07% 2.85% 2.86% -0.21% 0.01% Operating Profits / Assets (%) 3.40% 3.39% 3.37% -0.03% -0.02% Provisions / Assets (%) 0.54% 0.61% 0.48% -0.06% -0.13% ROA (%) 1.87% 1.83% 1.89% 0.02% 0.07% Exhibit 2. IndusInd Bank: Loan book spreads Exhibit 3. IndusInd Bank: Overall asset spread remain stable 10.0% CCB loan spread CFD loan spread Overall loan spread 5% Overall asset spread 8.0% 4% 3.97% 4.00% 4.00% 4.00% 4.00% 4.00% 3.99% 6.0% 3% 4.0% 2% 2.0% 1% 0.0% 0% JM Financial Institutional Securities Limited Page 2

3 Exhibit 4. One year fwd Price / BVPS Exhibit 5. One year fwd Price / earnings Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 IIB Fwd. P/BV (x) SD+1 SD-1 Average IIB Fwd. P/E (x) SD+1 SD-1 Average Exhibit 6. IndusInd Bank : Balance sheet growth momentum continues (Rs mn) Deposits Increase Loans Increase -30 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Exhibit 7. IndusInd Bank: Risk weighted assets composition RWAs Composition (INR bn) YoY (%) QoQ (%) Credit risk, CVA and UFCE , % 1.5% Market risk % 15.5% Operational risk % 0.0% Total RWAs 1,318 1,561 1, % 2.1% Loans 1,028 1,232 1, % 4.4% Exposure - Fund based exposure 1,295 1,653 1, % 4.3% - Non-Fund based exposure % 4.0% Total exposure 1,896 2,283 2, % 4.2% RWA/ Total loans 128% 127% 124% -4.2% -2.7% RWA/ Total exposure 69% 68% 67% -2.5% -1.4% Source: JM Financial, Company JM Financial Institutional Securities Limited Page 3

4 Exhibit 8. Indusind Bank: Loan book mix; Consumer finance growing strong Loan Book Composition (INR bn) YoY (%) QoQ (%) Consumer Finance Comm. Vehicle Loans % 9.5% Utility Vehicle Loans % 6.8% Small CV (Incld 3Ws) % 3.2% 2Ws loans % 6.3% Car loans % 4.2% Tractor % 10.5% Equipment Financing % 8.3% Credit card % 9.0% LAP % 3.6% Others (Home, Personal) % 10.6% Total % 7.4% Corporate & commercial Banking Large corporates % 1.3% Mid size corporates % 2.1% Small corporates % 5.2% Total % 2.3% Total Advances 1, , , % 4.4% Loan Mix (%) Consumer Finance Comm. Vehicle Loans 14.2% 13.3% 14.0% -0.2% 0.7% Utility Vehicle Loans 2.2% 2.0% 2.1% -0.1% 0.0% Small CV (Incld 3Ws) 2.3% 1.9% 1.9% -0.4% 0.0% 2Ws loans 3.2% 2.7% 2.7% -0.5% 0.0% Car loans 4.4% 4.1% 4.1% -0.4% 0.0% Tractor 1.7% 1.8% 2.0% 0.2% 0.1% Equipment Financing 3.8% 3.7% 3.9% 0.1% 0.1% Credit card 1.5% 1.8% 1.8% 0.4% 0.1% LAP 6.3% 6.1% 6.1% -0.2% 0.0% Others (Home, Personal) 2.1% 2.6% 2.8% 0.7% 0.2% Total 41.7% 40.2% 41.3% -0.4% 1.2% Corporate & commercial Banking Large corporates 27.5% 29.3% 28.5% 1.0% -0.9% Mid size corporates 19.2% 19.1% 18.7% -0.5% -0.4% Small corporates 11.6% 11.4% 11.5% -0.1% 0.1% Total 58.3% 59.8% 58.7% 0.4% -1.2% Total Advances 100% 100% 100% Exhibit 9. IndusInd Bank: Risk weighted assets as % of total Exhibit 10. IndusInd Bank: Growth in credit RWA 100% 90% RWA/Total Assets 85% 80% 82% 83% 83% 81% 83% 77% 79% 80% 80% 79% 76% 38% Credit RWA YoY (%) RWA YoY (%) Loan growth YoY 80% 70% 33% 60% 50% 28% 40% 30% 23% 20% 18% 10% 0% 13% JM Financial Institutional Securities Limited Page 4

5 Exhibit 11. IndusInd Bank: CASA and NIM CASA (%) (LHS) Reported NIMs 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 4.2% 4.0% 3.8% 3.6% 3.4% 3.2% 3.0% 2.8% 2.6% Exhibit 12. IndusInd Bank: Yield on loans trends Exhibit 13. IndusInd Bank: Cost of deposits trends 16.5% 16.0% 15.5% 15.0% Total (RHS) CFD CCB (RHS) 14% 13% 12% 11% 10% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% Cost of deposits (%) 14.5% 14.0% 1Q14 2Q14 9% 8% 6.0% 5.5% 5.0% 1Q14 2Q14 Exhibit 14. IndusInd Bank: Fee income composition Fee income Composition (INR mn) YoY (%) QoQ (%) Trade & Remittances 1,061 1,280 1, % -0.8% Loan Processing Fees 1,946 2,140 2, % 13.1% FX income 1,793 1,830 2, % 10.4% TPP Dist income (MF, Insurance) 1,812 2,370 2, % 8.0% Investment Banking Income 1,599 1,860 1, % -3.2% General Banking fee % 7.7% Total 8,848 10,130 10, % 6.3% JM Financial Institutional Securities Limited Page 5

6 Exhibit 15. IndusInd Bank: Operating costs and cost to income trends 52% 50% 48% 46% 44% 42% Source: JM Financial, Company Op. Cost / Assets (%) 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Cost to Income (%) (LHS) 3.0% 2.8% 2.6% 2.4% 2.2% 2.0% Exhibit 16. IndusInd Bank: Trends in credit cost and NPL ratios (%) Gross NPLs (%), LHS Net NPLs (%), LHS Coverage (%), RHS 2.0% 1.5% 1.0% 0.5% 0.0% 90% 80% 70% 60% 50% 40% 30% JM Financial Institutional Securities Limited Page 6

7 Financial Tables Profit & Loss (INR bn) Net Interest Income Profit on Investments Exchange Income Fee & Other Income Non-Interest Income Total Income Operating Expenses Pre-provisioning Profits Loan-Loss Provisions Provisions on Investments Others Provisions Total Provisions PBT Tax PAT (Pre-Extraordinaries) Extra ordinaries (Net of Tax) Reported Profits Dividend paid Retained Profits Balance Sheet (INR bn) Equity Capital Reserves & Surplus Deposits , , , ,674.8 Borrowings Other Liabilities Total Liabilities 1, , , , ,760.3 Investments Net Advances , , , ,515.2 Cash & Equivalents Fixed Assets Other Assets Total Assets 1, , , , ,760.3 Key Ratios Growth (YoY) (%) Deposits Advances Total Assets NII Non-interest Income Operating Expenses Operating Profits Core Operating profit Provisions Reported PAT Yields / Margins (%) Interest Spread NIM Profitability (%) Non-IR to Income Cost to Income ROA ROE Assets Quality (%) Slippages Gross NPA Net NPAs Provision Coverage Specific LLP Net NPAs / Networth Capital Adequacy (%) Tier I CAR Dupont Analysis NII / Assets Other Income / Assets Total Income / Assets Cost / Assets PBP / Assets Provisions / Assets PBT / Assets Tax rate ROA RoRWAs Leverage ROE Valuations Shares in Issue EPS (INR) EPS (YoY) (%) PER (x) BV (INR) BV (YoY) (%) ABV (INR) ABV (YoY) (%) 50.2% 16.4% 18.9% 17.1% 19.4% P/BV (x) P/ABV (x) DPS (INR) Div. yield (%) JM Financial Institutional Securities Limited Page 7

8 History of Earnings Estimate and Target Price Date FY18E EPS (INR) % Chg. FY19E EPS (INR) % Chg. Target Price 11-Jul ,650 % Chg. 1-Sep , Sep , Oct , Oct , Recommendation History IndusInd Bank B B BB 0 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Target Price IndusInd Bank JM Financial Institutional Securities Limited Page 8

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