IndusInd Bank. CMP: INR345 TP: INR419 Buy

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1 BSE SENSEX S&P CNX 17,504 5,332 Bloomberg IIB IN Equity Shares (m) Week Range (INR) 352/222 1,6,12 Rel.Perf.(%) 13/25/34 M.Cap. (INR b) M.Cap. (USD b) April QFY12 Results Update Sector: Financials IndusInd Bank CMP: INR345 TP: INR419 Buy Indusind Bank's (IIB) 4QFY12 PAT grew 30% YoY to INR2.23b (in-line with our estimate). While non-interest income was 3% below our estimate, lower-than-expected meant that PAT was in-line. Strong traction in savings account growth: SA customer acquisition increased 14% QoQ and 82% YoY to 0.15m in the quarter. Post deregulation of savings deposits rates, proportion of SA to overall deposits has increased to 11.1% vs 8.6% as on 1HFY12. Growth in SA deposits was robust at+18% QoQ and 53% YoY. Fee income - a key RoA driver: Fee income growth (+60% YoY ) remains strong across all categories. Share of fee income to average assets in 4QFY12 has increased to 1.9% vs 1.5% a year ago - a key ROA driver. Margin performance impressive: Margins remained largely stable (+4bp QoQ) at 3.29% as 11bp increase in cost of funds was offset by 12bp QoQ increase in yield on loans. In a stressed liquidity situation and with a higher proportion of wholesale deposits (50%) in the balance sheet, a largely stable margin QoQ is impressive. Other highlights: (a) High yielding CFD grew ~10% QoQ and 48% YoY and contributed 60%+ of the incremental yearly loan growth. Share of CFD improved further to 49.2% v/s 48.4% in 3QFY12 and 44.4% as of FY11 (b) In absolute terms, GNPA increased 4% QoQ to INR3.5b; Annualized slippage ratio stood at 1.28%. Valuation and view: IIB's superior margins, focused fee income strategy and control over cost-to-income ratio will keep core operating profitability strong. While asset quality remains strong, we model higher credit cost of 70-80bp over FY13-14 v/s average of 45bp in FY12, to factor in possible rise in delinquencies. However, levers for margin improvement and strong fee income growth will keep RoAs strong at 1.6%+ over FY12/14. Maintain Buy. Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com) Sohail Halai (Sohail.Halai@MotilalOswal.com)

2 Quarterly performance v/s our estimates (INR m) Y/E March 4QFY12E 4QFY12A V/S our Est Comments Net Interest Income 4,548 4,644 2 Margins remain largely stable - a positive surprise % Change (Y-o-Y) Other Income 3,010 2,921-3 Strong fee income growth - a key ROA driver Net Income 7,557 7,565 0 Operating Expenses 3,689 3,774 2 In 4QFY12 bank opened 35 branches taking branch network to 400 Operating Profit 3,869 3,791-2 % Change (Y-o-Y) Other Provisions Asset quality remains impressive Profit before Tax 3,240 3,331 3 Tax Provisions 1,043 1,097 5 Net Profit 2,197 2,234 2 Lower provisions leading to higher than est. profits % Change (Y-o-Y) Source: Company/MOSL Margin performance impressive Reported margin remained largely stable at 3.29% (up 4bp QoQ) in 4QFY12 as 11bp QoQ increase in cost of funds was offset by the near equivalent increase in yield on loans (up 12bp QoQ). In a stressed liquidity situation and with a higher proportion of wholesale deposits (50%) in the balance sheet, a largely stable margin QoQ is impressive. Margin for FY12 stood at 3.33% v/s 3.47% in FY11. In an easing interest rate scenario, higher proportion of fixed rate loans and growing CASA ratio would aid margins. Fee income a key RoA driver Fee income growth (up 60% YoY to INR2.6b) remains strong across all categories. Forex income grew 73% YoY to INR460m and investment banking fees improved to INR398m v/s INR113m a year ago. Trade and Processing fees were up 30% and 35% YoY, respectively. Trading profits stood at INR274m v/s INR131m in 3QFY12. Share of fee income to average assets has increased to 1.9% from 1.5% a year ago - a key RoA driver. During FY10-12, contribution of fee income to average assets has increased by ~40bp, boosting RoA. Management mentioned that ~55% of the feebased income is de-linked from the balance sheet and is witnessing strong traction. And guided that fee income growth is likely to be higher than balance sheet growth. Consumer finance division driving loan growth Loan growth remained above industry average increasing 8% QoQ and 34% YoY to INR351b in 4QFY12. Incremental loan growth was driven by high-yielding CFD (up ~10% QoQ and 48% YoY). Corporate advances grew 6.6% QoQ and 22.6% YoY. Share of consumer finance continued to grow and stood at 49.2% v/s 48.4% a quarter ago. The growth in consumer finance segment was broad-based with all its sub-segments (CV, utility, car, two-wheeler and equipment financing) growing at 10-15% QoQ. Credit cards and personal loan/lap increased ~18% QoQ to INR7.9b. Management is targeting a loan growth of 25-30% over FY13-14, with key focus on consumer finance and high yielding loans. Niche positioning in CV financing, branch expansion, increased focus on small and mid corporate clients, and strong 20 April

3 relationships with large corporate clients should enable IIB to sustain higher than industry loan growth. Strong traction in savings account growth Savings account customer acquisition increased 14% QoQ and 82% YoY to 0.15m in the quarter. Higher savings deposit rates and focused customer acquisition strategies led to strong traction in SA deposits growth. Post the deregulation of savings deposits rates, the proportion of SA to overall deposits has increased to 11.1% from 8.6% as on 1HFY12. While growth in SA deposits was robust (+18% QoQ and 53% YoY), CA deposits growth moderated to 1% QoQ and 10% YoY leading to CASA growth of 24% YoY. Overall, CASA ratio improved 80bp QoQ to 27.3%. Management intends to increase CASA ratio further to 34-35% by FY14. Asset quality continues to surpirse positively In absolute terms, GNPAs increased 4% QoQ to INR3.5b, whereas in percentage terms, GNPAs and NNPAs declined marginally to 0.98% (down 4bp) and 0.27% (down 2bp), respectively. Slippages during the quarter stood at INR840m v/s INR680m in 3QFY12 (annualized slippage ratio stood at 1.28%). Of the total slippages during the quarter, INR210m is on account of corporate banking segment and balance INR630m is attributable to consumer financing segment. Strong risk management practices and stable freight rates are leading to strong asset quality performance in consumer financing segment despite challenging environment. Proportion of restructured loan remains low at just 26bp. Other highlights (1) Capital adequacy ratio stood at 13.9% with Tier I capital at 11.4%. Management targets to raise capital once Tier I ratio reaches near 10%. (b) Momentum in branch expansion continues with bank adding 35 branches during the quarter. Management targets to increase its branch network to 600 by FY14. Valuations and view IIB's superior margins, focused fee income strategy and control over cost-to-income ratio will keep core operating profitability strong. Improving liability franchise, structural improvement in RoA and 25%+ asset growth should help IIB to post one of the highest PAT CAGR (~30%) among the banks under our coverage. Though asset quality remains strong, we have modeled in higher credit cost of 70-80bp for FY13/14 v/s average of 45bp in FY12, to factor in possible rise in delinquencies. However, levers for margin improvement and strong fee income growth would keep RoAs strong at 1.6%+ over FY While we maintain our estimates for FY13, we upgrade FY14 estimates by ~5% to factor in higher-than-expected growth. We expect IIB to report EPS of INR22.5 in FY13 and INR29.2 in FY14, and BV of INR115 and INR140, respectively. The stock trades at 11.8x FY14E EPS and 2.5x FY14E BV. Maintain Buy with target price of INR419 (3x FY14E BV). 20 April

4 We upgrade our FY14 earnings estimates by ~5% (INR b) Old Estimates Revised Estimates Change (%) FY13 FY14 FY13 FY14 FY13 FY14 Net Interest Income Other Income Total Income Operating Expenses Operating Profits Provisions PBT Tax PAT Loans Deposits Margins (%) Credit Cost (%) RoA (%) RoE (%) Source: MOSL IndusInd Bank: One year forward P/E (x) IndusInd Bank: One year forward P/BV (x) 20 April

5 Quarterly trends Above industry average loan growth (%) Deposit growth moderates on a higher base Sequential loan growth driven by consumer finance segment and its share increased to 49.2% v/s 48.4% in 3QFY12 Deposits growth w 23% YoY and 4% QoQ to INR424b CASA ratio improves QoQ led by growth in SA deposits (%) CD ratio improves QoQ (%) CASA deposits grew at 7% QoQ and 24% YoY led by strong growth in SA deposits (+18% QoQ and 53% YoY) Opportunistic utilization of borrowing and refinancing facility led to improvement in CD ratio CoD and YoL grow in line QoQ (%) NIM (on total assets) stable QoQ (+4bp) (%) Increase in cost of funds by 11bp QoQ was offset by near equivalent increase in yield on loans (+12bp QoQ) Depsite tight liquidity condition bank has been able to maintain its margin which is impressive 20 April

6 Quarterly trends Fee income traction continues (%) C/I ratio increases QoQ (%) Share of fee income to average assets has increased to 1.9% in 4QFY12 vs 1.5% a year ago With bank planning to add 250 branches over next two years C/I ratio is expected to remain high Incremental loan mix driven by consumer finance (%) Asset quality continue to surpirse positively Incremental loan mix continues to shift in favor of the consumer finance segment Slippages during the quarter amounted to INR840m and annualized slippage ratio stood at 1.28%. Dupont analysis (%) FY10 FY11 FY12 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Net Interest Income Fee income Core Income Operating Expenses Of which employee Other expenses Cost to Core Income (%) Core Operating Profits Other Income (Ex Fees) Operating Profits Provisions PBT Tax/avg assets (%) RoAA Leverage (x) RoAE April

7 Quarterly Snapshot FY11 FY12 Variation (%) Cumulative Numbers 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q QoQ YoY FY11 FY12 YoY Gr(%) Profit and Loss (INR m) Net Interest Income 2,957 3,297 3,630 3,880 3,900 4,192 4,307 4, ,764 17, Other Income 1,610 1,751 1,960 1,816 2,154 2,392 2,651 2, ,137 10, Trading profits Profits on sale of assets N.A. N.A N.A. Others (Ex non core) 1,326 1,631 1,719 1,649 1,871 2,148 2,504 2, ,324 9, Total Income 4,566 5,049 5,590 5,696 6,054 6,584 6,958 7, ,901 27, Operating Expenses 2,260 2,430 2,678 2,717 2,937 3,254 3,465 3, ,085 13, Employee ,002 1,107 1,152 1,261 1, ,827 4, Others 1,370 1,476 1,698 1,715 1,830 2,102 2,204 2, ,258 8, Operating Profits 2,306 2,619 2,912 2,980 3,117 3,330 3,492 3, ,816 13, Provisions ,019 1, PBT 1,819 2,051 2,350 2,577 2,671 2,860 3,064 3, ,797 11, Taxes ,005 1, ,025 3, PAT 1,186 1,332 1,539 1,717 1,802 1,931 2,060 2, ,772 8, Asset Quality GNPA 2,752 2,864 3,060 2,659 3,093 3,326 3,342 3, NNPA GNPA (%) NNPA (%) PCR (Calculated, %) Ratios (%) Fees to Total Income Cost to Core Income Tax Rate CASA (Reported) Loan/Deposit CAR RoA RoE Margins (%) - Reported Yield on loans Cost of deposits Margins Balance Sheet (INR b) Loans Investments Deposits CASA Deposits of which Savings Current Borrowings Total Assets Risk Weighted Assets For %age change QoQ and YoY is bp Source: Company/MOSL 20 April

8 EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY year Sensex rebased Shareholding pattern (%) Mar-12 Dec-11 Mar-11 Promoter Domestic Inst Foreign Others April

9 Financials and Valuation 20 April

10 Financials and Valuation 20 April

11 N O T E S 20 April

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