IndusInd Bank (IIB) IIB IN; IIB.BO

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1 Banking India IndusInd Bank (IIB) IIB IN; IIB.BO Institutional Equity Research January 12, 216 result review BUY Strong all-round performance Current price (12 Jan) Rs 913 Target price Rs 1,11 Upside/(downside) % 22 Earning estimate Unchanged Market data Mkt capitalisation Rs bn Average daily vol ' week H/L Rs / 784 Shares O/S mn Free float mn 54.7 Promotor holding % 15. Foreign holding % 35.7 Face value Rs 1. Price performance 1m 3m 6m 1yr Nifty (abs) (1.3) (7.8) (1.2) (9.8) Stock (abs) (.3) (3.3) Relative to Index Performance (Rs) 7 (1) Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 IIB (LHS) Source: Bloomberg, SSLe Rel. to Bankex (RHS) IndusInd Bank s (IIB) earnings came in line with SSLe at Rs5,81mn (up 29.9% YoY), driven by a healthy net interest income and robust fee income growth. Asset quality remained steady during the quarter. Fuelled by robust growth prospects, high NIM and strong fee income traction, we maintain BUY on the Bank. Strong loan growth continues (ex-gems and jewellery business): The Bank s advances grew 28.7% YoY. Overall, IIB s corporate loan book improved 3% YoY, with its share in the overall loan book increasing 6bps YoY to 58.3% in. The consumer finance division also picked pace to reach 27% YoY the fastest in the last five quarters driven by the commercial vehicles, car and LAP segments growing 31.5% YoY, 25.6% YoY and 23% YoY, respectively. We expect the Bank s advances to expand at a CAGR of ~28% over F15 F18. NIM expansion continues; strong show in fees: IIB s NIMs improved by 2bps QoQ to 3.9%, driven by CASA, with the share of CASA improving to 35.% (up 92bps YoY). With the share of higher yielding assets like two wheelers and credit cards, the fall in yield is slower compared to the cost of funds. A higher CASA share and better higher yielding retail lending is expected to help NIM sustain 3.8% over F16e/F17e. The Bank s non-interest income jumped 37.4% YoY, driven by improvement in processing fees (up 13% YoY) and trade fees (up 36% YoY). As a percentage of assets, fee income improved 3bps YoY to 2.6%. We expect stable fees and productivity going forward. Asset quality stable, geared up for growth: While IIB s gross slippages at 14bps of advances (annualized) increased by 26bps YoY largely from the corporate portfolio. Moreover, the retail book s asset quality improved. We build a 6bps credit cost over F17/F18e. The Bank is well capitalized for strong loan growth, having a Tier 1 capital of 15.6%. Valuations: Strong advance growth, high NIM and diversified stream of fee income are expected to drive a robust 1.9% RoA over F16e/F17e. At our target price, the stock will trade at 3.3x F17e and 2.9x F18e PBV. Key Risks: a) Delay in pickup in CV cycle and b) change in management. Kaitav Shah, CFA kaitav.shah@sbicapsec.com Sanket Chheda sanket.chheda@sbicapsec.com Sanketa Save sanketa.save@sbicapsec.com Financial summary Y/E March (Rs mn) F14 F15e F16e F17e F18e Net interest income 28,97 34,23 44,977 57,854 71,22 NIM Operating profit 25,96 3,982 4,381 51,636 63,97 PAT 14,8 17,937 23,394 3,4 37,237 EPS (Rs) ABV (Rs) 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 NII growth is healthy, driven by all-round loan growth Both core fee income and treasury profits support other income. Quarterly financials Y/E March (Rs mn) YoY QoQ e Var. Interest earned 29,277 24, , ,834 (1.9) Interest expended 17,543 15, , ,158 (3.4) Net interest income 11,734 8, , ,676.5 Other income 8,39 6, , , Operating income 2,124 14, , , Operating expenses 9,514 6, , , staff expenses 3,267 2, , ,252.5 Cost-income bps bps bps Operating profit 1,61 7, , , Non-tax provisions 1, , , Profit before tax 8,839 6, , ,877 (.4) Taxes 3,29 2, , , Tax rate bps bps bps Profit after tax 5,81 4, , ,944 (2.3) Extraordinary income... Profit after tax 5,81 4, , ,944 (2.3) Key takeaways from analyst call: Elevated loan processing fee derived from renewable fee of new diamond portfolio, disbursement fee and renewals of existing loans. Retail fee share contributes 35% from the total loan processing fee. Management has managed to diversify the corporate loan book by marginally decreasing the share of steel and power transmission. Branch expansion target of 12 branches remains to be intact for F17. Operating expenditure is likely to increase in the range of 1-2% in F17 as the bank is investing in branch expansion, technology especially for treasury business etc. Vehicle finance book disbursement has amounted to Rs52.5bn. Sale to ARC stands at Rs.53bn in, of which recovery amounts to Rs.22bn. kaitav.shah@sbicapsec.com I sanket.chheda@sbicapsec.com sanketa.save@sbicapsec.com January 12, 216 2

3 Advances growth remains robust All-round loan growth during the quarter (in Rs bn) % (Rs bn) % 5% % Advances (LHS) Credit-deposit (RHS) 6 % Commercial Vehicles Equipment Financing Two wheelers Car Loans Utility Vehicle + 3W Home Loan + LAP Personal Loans + Credit Card Corporate banking Small Business Strong strides in CASA share Investment in branch network drives higher cost (Rs bn) (Rs mn) CASA (LHS) CASA share (RHS) Strong Fee income generation continues Avg. profit per branch (LHS) Core cost-income (RHS) Asset quality remains sees some deterioration (Rs mn) (bps) Fees & Comm. (LHS) % of avg earnings assets (RHS) Annualized NPA prov (LHS) NPA coverage (RHS) kaitav.shah@sbicapsec.com I sanket.chheda@sbicapsec.com sanketa.save@sbicapsec.com January 12, 216 3

4 Yield and cost trend Drop in Yield is slower than the drop in cost Yield on corporate book Yield on consumer finance business Cost of Deposits Fee income witnessed strong traction, especially forex and investment banking Breakup of Fee Income General banking fees Processing Fee ,16 1,44 1,448 1,854 FX 1,394 1,688 1,12 1,595 1,696 1,71 Insurance ,274 1,7 1,192 1,26 Investment Banking ,229 1,14 1,13 Trade & remittances Total core fee income 5,93 5,223 5,686 5,989 6,733 7,259 as % of assets Other income Total non-interest income 5,583 6,18 6,585 7,243 7,835 8,39 Asset quality Slippages 1,13 1,61 4,49 1,33 1,89 2,52 -share in advances Restructured advances 3,116 3,512 3,646 4,551 4,933 4,766 -share in advances Breakup of retail GNPAs Corporate NPAs have increased GNPA in the CV cycle is improving. Twowheeler lending has slowed down CV Utility CE Small CV Two-wheelers Cars LAP/HL/PL Cards kaitav.shah@sbicapsec.com I sanket.chheda@sbicapsec.com sanketa.save@sbicapsec.com January 12, 216 4

5 Valuations and outlook Strong advance growth, high NIM and diversified stream of fee income are expected to drive a robust 1.9% RoA over F16e/F17e. At our target price, the stock will trade at 3.3x F17e and 2.9x F18e PBV). PBV chart (1-year forward) 1,4 1,5 (Rs) 7 35 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Price 1.5x 2.5x 3.5x 4.5x Historical PBV mean valuations (1-year forward) IIB continues to trade at higher-thanhistorical valuations on high return ratios expectations (x) Apr-8 Aug-8 Dec-8 Apr-9 Aug-9 Dec-9 Apr-1 Aug-1 Dec-1 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 mean stdev +1SD -1SD +2SD -2SD PE chart (1-year forward) 1,2 9 (Rs) 6 3 Apr-6 Aug-6 Dec-6 Apr-7 Aug-7 Dec-7 Apr-8 Aug-8 Dec-8 Apr-9 Aug-9 Dec-9 Apr-1 Aug-1 Dec-1 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Prices 1x 15x 2x 25x kaitav.shah@sbicapsec.com I sanket.chheda@sbicapsec.com sanketa.save@sbicapsec.com January 12, 216 5

6 Roaa decomposition Key Assumptions Y/E March F14 F15 F16e F17e F18e Y/E Mar (Rs mn) F16e F17e F18e 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) F14 F15 F16e F17e F18e Y/E March (Rs mn) F14 F15 F16e F17e F18e Interest earned 82,535 96,92 118, , ,58 Earning ratios Interest expended 53,628 62,717 73,515 9, ,838 Yield on advances Net interest income 28,97 34,23 44,977 57,854 71,22 Yield on investments Growth Cost of deposits Other income 18,95 24,39 3,8 36,892 44,554 Spread Fee-based income 11,76 15,484 19,82 24,577 29,984 NIM Treasury income 1,282 1, C/I ratio Other miscellaneous income 5,918 7,377 9,36 11,615 14,7 C/I (excl. treasury gains) Operating income 47,812 58,241 75,57 94, ,774 Growth Profitability ratios Operating expenses 21,853 27,259 34,676 43,19 52,677 RoE Staff cost 8,93 9,85 12,483 15,735 19,227 RoA Other operating expense 13,76 17,455 22,193 27,374 33,45 OPM Pre-provision profits (PPP) 25,96 3,982 4,381 51,636 63,97 NPM Growth Provisions 4,676 3,891 5,254 6,121 6,677 Asset quality Profit before taxes 21,283 27,92 35,127 45,515 56,42 Gross NPAs Taxes 7,23 9,155 11,732 15,475 19,183 Net NPAs Tax rate NPA coverage Profit after taxes 14,8 17,937 23,394 3,4 37,237 NNPA/networth Growth Capital adequacy ratio Tier-I Balance sheet Tier-II Y/E March (Rs mn) F14 F15 F16e F17e F18e Total Capital 5,256 5,295 5,91 5,934 5,957 Equity Multiplier (x) Reserves & surplus 85,173 11,151 17, ,6 227,596 Networth 9,43 16, ,535 21, ,554 Per share data (Rs) Deposits 65,23 741, ,69 1,229,813 1,579,26 O/s shares (mn.) Borrowings 147,62 26, , , ,4 EPS Other liabilities & provisions 27,187 37,19 4,99 44,999 49,499 Book value per share Total liabilities 87,259 1,91,16 1,35,5 1,72,59 2,121,12 Adjusted book value Dividend per share Cash & Bank Balances 67,694 17, ,75 13,2 139,322 Advances 551,18 687,882 88,489 1,131,428 1,436,914 Valuations (x) Investments 215,63 248, , , ,918 P/E Fixed assets 1,164 11,576 25,515 32,169 39,135 P/BV Other assets 25,753 35,316 31,185 39,318 47,831 P/ABV Total assets 87,259 1,91,159 1,35,5 1,72,59 2,121,12 Dividend yield kaitav.shah@sbicapsec.com I sanket.chheda@sbicapsec.com sanketa.save@sbicapsec.com January 12, 216 6

7 Recommendation History BUY HOLD SELL Stock Price Target Price Date Stock Price TP Rec. 1-Jan BUY 17-Apr BUY 9-Jul BUY 13-Oct HOLD 3-Mar HOLD 16-Apr HOLD 13-Jul ,7 BUY 9-Oct ,11 BUY 12-Jan ,11 BUY Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 (Rs) Source: Bloomberg, SSLe SBICAP Securities Limited (CIN): U65999MH25PLC Research Analyst Registration No INH62 SEBI Registration No.: NSE Capital Market: INB NSE Derivatives: INF BSE Capital Market: INB Currency Derivatives: INE CDSL: IN-DP-CDSL IRDA/IR2/214/241 Corporate Office: Mafatlal Chambers, A-Wing, 2nd Floor, N. M. Joshi Marg, Lower Parel, Mumbai Tel.: /1 Fax: sbicapresearch@sbicapsec.com KEY TO INVESTMENT RATINGS (w.e.f. February 213) 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 -1 to 15 percentage points); 3=SELL (expected to give absolute returns less then -1 percentage points) DISCLOSURES & DISCLAIMERS Analyst Certification The views expressed in this research report ( Report ) accurately reflect the personal views of the research analysts ( Analysts ) employed by SBICAP Securities Limited (SSL) about any and all of the subject issuer(s) or company(ies) or securities. This report has been prepared based upon information available to the public and sources, believed to be reliable. I/We also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. The Analysts engaged in preparation of this Report or his/her relative:- (a) do not have any financial interests in the subject company mentioned in this Report; (b) do not own 1% or more of the equity securities of the subject company mentioned in the report as of the last day of the month preceding the publication of the research report; (c) do not have any material conflict of interest at the time of publication of the Report. The Analysts engaged in preparation of this Report:- (a) have not received any compensation from the subject company in the past twelve months; (b) have not managed or co-managed public offering of securities for the subject company in the past twelve months; (c) have not received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months; (d) have not received any compensation for products orservices other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months; (e) have not received any compensation or other benefits from the subjectcompany or third party in connection with the Report; (f) has not served as an officer, director or employee of the subject company; and (g) are not engaged in market making activity for the subject company. Name Qualification Designation Kaitav Shah B.Com, MMS (Finance), CFA Lead Analyst Sanket Chheda BBA, MBA (Finance) Associate Sanketa Save BBI, MBA (Finance) Associate kaitav.shah@sbicapsec.com I sanket.chheda@sbicapsec.com sanketa.save@sbicapsec.com January 12, 216 7

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