IndusInd Bank (IIB) IIB IN; IIB.BO

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1 Banking India (IIB) IIB IN; IIB.BO Institutional Equity Research April 16, 2015 result review HOLD Healthy growth, high NIM, rich valuations Current price (16 Apr) Rs 934 Target price Rs 960 Upside/(downside) % 3 Earning estimate Revised Market data Mkt capitalisation Rs bn Average daily vol ' week H/L Rs 967 / 471 Shares O/S mn Free float mn Promotor holding % 15.1 Foreign holding % 39.7 Face value Rs 10.0 Price performance 1m 3m 6m 1yr Nifty (abs) Stock (abs) Relative to Index Performance (20) Apr-14 Jul-14 Oct-14 Jan-15 IIB (LHS) Source: Bloomberg, SSLe Rel. to Bankex (RHS) Robust advance growth, driven by corporate book: s (IIB) earnings came largely inline with SSLe in, driven by a healthy net interest income and robust fee income growth. The Bank s advances grew well ahead of system at 24.8% YoY (7.7% QoQ). The corporate loan book improved 33.2% YoY to push credit growth, with its share in the overall loan book increasing 370bps YoY to 58.7% in. While the consumer finance division grew at a slower pace, dragged by the vehicle-finance business lending to the loan against property (LAP), the home loan segment grew at a robust pace. The share of LAP in the overall loan book has increased to 5.5% from 4.9% a year ago. We expect advances to grow at a CAGR of ~26% over F15 F17. Stable NIM, better fees, lower productivity: NIM remained stable at 3.65 during the quarter, with improvement in the CASA share and a higher credit-deposit of 93%. The Bank rationalized the higher interest rates on savings bank products (4% up to 100k). The management is well on track to double its branch network to 1200 by F17e (7 in F15). A higher CASA share and improving cost of funds are expected to help NIM improve to 3.9% by F17e. The Bank s non-interest income jumped 26% YoY, driven by improvement in fee income. As a percent of assets, fee income has improved 12bps to 2.4%. Productivity decreased marginally (cost-income increased 140bps to 46.3%) on account of continuous investment in branches and employees. We expect stable fees and productivity going forward. Higher slippages, better outlook: IIB s gross NPA improved to 0.8% driven by selling accounts to asset reconstruction companies. However, gross slippages increased to 3% of advances compared to 1.5% in, largely on account of corporate segment. The management expects asset quality to remain stable going forward. An adequate NPA coverage of 63% and low re-structured portfolio of 0.5%, likely to keep credit costs under check. Valuations: a) Healthy asset quality, b) steady NIMs and c) robust advance growth, are expected to drive a robust 1.8% ROA over F16e/F17e. On the back of rich valuations, we maintain HOLD on the stock with a target price of Rs960. At our target price, the stock would trade at 4.0x F16e and 3.5x F17e PBV. Our target price is based on the two-stage DDM (CoE: 14.9%; beta: 1.1;Rf: 8.0%) valuation method. Key Risks: a) Delay in pickup in CV cycle and b) change in management. Kaitav Shah kaitav.shah@sbicapsec.com Sanket Chheda sanket.chheda@sbicapsec.com Financial summary Y/E March (Rs mn) F13 F14 F15e F16e F17e Net interest income 22,329 28,907 34,203 42,743 55,316 NIM Operating profit 18,395 25,960 30,984 38,738 48,128 PAT 10,612 14,080 17,937 22,888 28,491 EPS ABV P/ABV (x) P/E (x) Dividend yield RoE RoAA SBICAP Research on Bloomberg SBICAP <GO>, Please refer to our disclaimer given at the last page.

2 Quarterly financials Y/E March (Rs mn) YoY QoQ e Var. Interest earned 25,790 21, , , Interest expended 16,538 13, , ,538 (0.0) Net interest income 9,251 7, , , Other income 6,585 5, , ,585 (0.0) Operating income 15,836 13, , , Operating expenses 7,331 5, , ,331 (0.0) -staff expenses 2,654 2, , ,654 (0.0) Cost-income bps bps bps Operating profit 8,505 7, , , Non-tax provisions 1,074 1,206 (10.9) , Profit before tax 7,431 5, , , Taxes 2,478 2, , ,482 (0.1) Tax rate bps bps bps Profit after tax 4,953 3, , , Extraordinary income Profit after tax 4,953 3, , , Key takeaways from analyst meet: The CV cycle has bottomed out and the Bank is ready to take advantage of the uptick. Slippages from the portfolio are likely to come off. The Bank intends to increase the retail loan book portfolio to nearly 50%. The management intends to maintain NIM and CASA at 4% and 40%, respectively, in the medium term. IIB s LAP segment continues to do well. The average ticket size in the portfolio is close to Rs7.5mn, with its loan to value segment standing at 48%. The acquired diamond and jewellery portfolio maintained a stable performing book, with NPA coming below 0.5%. The Bank has added about 32 employees by virtue of this acquisition. IIB s tie-up with ABN AMRO Bank is related to sharing of information and risk management practices. IIB sold four accounts to the tune of Rs4.1bn to asset reconstruction companies during the quarter, out of which RBI declared one account fraudulent. The Bank took a hit of Rs2.5bn to be provided equally over eight quarters. The Bank s outstanding security receipts are worth Rsbn. IIB s capital adequacy with Tier 1 of 11.5% is adequate; however, the management will evaluate all capital raising opportunities if loan growth picks up. April 16,

3 Advances growth remains robust Shift to corporate continues (Rs bn) % 75% (Rs bn) % 25% Advances (LHS) Credit-deposit (RHS) 76 0% Commercial Vehicles Equipment Financing Two wheelers Car Loans Utility Vehicle + 3W Home Loan + LAP Personal Loans + Credit Card Corporate banking Strong strides in CASA share Investment in branch network drives higher cost (Rs bn) (Rs mn) CASA (LHS) CASA share (RHS) Avg. profit per branch (LHS) Core cost-income (RHS) 46 Fees are improving Stable asset quality (Rs mn) (bps) Fees & Comm. (LHS) % of avg earnings assets (RHS) Annualized NPA prov (LHS) NPA coverage (RHS) April 16,

4 PBV chart (1-yr forward) 1,250 1, Apr-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Price 1.5x 2.5x 3.5x 4.5x Historical PBV mean valuations (1-yr forward) Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 (x) mean stdev +1SD -1SD +2SD -2SD PE chart (1-yr forward) 1,250 1, Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Prices 10x 15x 20x 25x April 16,

5 Roaa decomposition Key Assumptions Y/E March F13 F14 F15e F16e F17e Y/E Mar (Rs mn) F15e F16e F17e Net interest income Balance Sheet Assumptions Other income Credit Growth (%YoY) Fee-based income Deposits Growth (%YoY) Treasury income Investments Growth (%YoY) Other miscellaneous income CD Ratio Operating income Operating expenses Asset Quality Assumptions Pre-provision profits (PPP) Slippage Ratio Provisions Net Recovery Ratio Profit before taxes Provisioning Cover Taxes Profit after taxes Financials Income statement Ratios Y/E March (Rs mn) F 13 F 14 F 15e F 16e F 17e Y/E March (Rs mn) F 13 F 14 F 15e F 16e F 17e Interest earned 69,832 82,535 96, , ,966 Earning ratios Interest expended 47,504 53,628 62,717 78,747 97,650 Yield on advances Net interest income 22,329 28,907 34,203 42,743 55,316 Yield on investments Growth Cost of deposits Other income 13,630 18,905 24,039 28,206 32,350 Spread Fee-based income 9,470 11,706 14,632 17,413 20,373 NIM Treasury income C/I ratio Other miscellaneous income 3,515 6,681 8,606 10,094 11,677 C/I (excl. treasury gains) Operating income 35,958 47,812 58,242 70,949 87,666 Growth Profitability ratios Operating expenses 17,564 21,853,258 32,211 39,537 RoE Staff cost 6,615 8,093 9,803 11,596 14,431 RoA Other operating expense 10,949 13,760 17,455 20,615 25,106 OPM Pre-provision profits (PPP) 18,395 25,960 30,984 38,738 48,128 NPM Growth Provisions 2,631 4,676 3,891 4,372 5,413 Asset quality Profit before taxes 15,764 21,283,093 34,366 42,715 Gross NPAs Taxes 5,152 7,203 9,157 11,478 14,224 Net NPAs Tax rate NPA coverage Profit after taxes 10,612 14,080 17,937 22,888 28,491 NNPA/networth Growth Capital adequacy ratio Tier-I Balance sheet Tier-II Y/E March (Rs mn) F 13 F 14 F 15e F 16e F 17e Total Capital 5,229 5,256 5,295 5,321 5,348 Equity Multiplier (x) Reserves & surplus 71,074 85, , , ,896 Networth 76,303 90, , , ,244 Per share data Deposits 541, , , ,099 1,238,188 O/s shares (mn.) Borrowings 94, , , , ,252 EPS Other liabilities & provisions 21,000,187 37,190 40,909 45,000 Book value per share Total liabilities 733, ,259 1,091,159 1,303,974 1,657,684 Adjusted book value Dividend per share Cash & Bank Balances 68,487 67, ,791 90, ,236 Advances 443, , , ,731 1,126,751 Valuations (x) Investments 196, , , , ,074 P/E Fixed assets 7,561 10,164 11,576 24,645 31,330 P/BV Other assets 17,269 25,753 35,316 30,122 38,292 P/ABV Total assets 733, ,259 1,091,159 1,303,974 1,657,684 Dividend yield April 16,

6 Recommendation History Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 BUY HOLD SELL Stock Price Target Price Date Stock Price TP Rec. 18-Apr BUY 10-Jul BUY 14-Oct BUY 10-Jan BUY 17-Apr BUY 9-Jul BUY 13-Oct HOLD 30-Mar HOLD HOLD Source: Bloomberg, SSLe SBICAP Securities Limited Corporate Office: Mafatlal Chambers, A-Wing, 2nd Floor, N. M. Joshi Marg, Lower Parel, Mumbai Tel.: /01 Fax: KEY TO INVESTMENT RATINGS (w.e.f. February 2013) Guide to the expected return over the next 12 months. 1=BUY (expected to give absolute returns of 15 or more percentage points); 2=HOLD (expected to give absolute returns between -10 to 15 percentage points); 3=SELL (expected to give absolute returns less then - 10 percentage points) DISCLAIMER We, Kaitav Shah, MBA (Finance) Analyst and Sanket Chheda (MBA Finance) Research Associate authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuers or securities. This report has been prepared based upon information available to the public and sources, believed to be reliable. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this report. SBICAP Securities Limited (SSL),a full service Stock Broking Company and a member of National Stock Exchange of India Ltd. 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