Earnings momentum remains strong April 21, 2016 Nitin Kumar nitinkumar@plindia.com / +91 22 66322236 Pritesh Bumb priteshbumb@plindia.com / +91 22 66322232 Vidhi Shah vidhishah@plindia.com / +91 22 66322258 Rating Accumulate Price Rs972 Target Price Rs1,050 Implied Upside 8.0% Sensex 25,880 Nifty 7,912 (Prices as on April 21, 2016) Trading data Market Cap. (Rs bn) 514.7 Shares o/s (m) 529.5 3M Avg. Daily value (Rs m) 1595.5 Major shareholders Promoters 14.98% Foreign 42.78% Domestic Inst. 11.02% Public & Other 31.22% Stock Performance (%) 1M 6M 12M Absolute 4.8 1.5 14.9 Relative 2.4 6.7 21.4 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 50.5 49.7 1.6 2018 66.8 62.8 6.4 Price Performance (RIC: INBK.BO, BB: IIB IN) (Rs) 1,200 1,000 800 600 400 200 0 Apr 15 Jun 15 Source: Bloomberg Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 IIB reported a steady quarter with Q4FY16 PAT growing by 25% YoY to Rs6.2bn (PLe: Rs6.22 bn). Other income continues to remain buoyant, while NII improved 37% YoY to Rs12.68bn, ~2% ahead of our estimates. Margins improved by 3bps QoQ led by continued momentum in CASA mix and retail loan growth. IIB is now targeting NIMs of 4% over the medium term. GNPLs increased 38% QoQ led by slippages in consumer portfolio, while IIB sold assets worth Rs400 mn to ARC, while recovered Rs300mn. We fine tune our earnings estimates and retain our PT at Rs1,050 based on 2.1x Sep 2017 ABV. We maintain Accumulate. Revenue growth on track: IIB delivered 36% YoY growth in core revenues led by 37.1% YoY growth in NII and 38.6% YoY growth in other income. Margins expanded by 3bps QoQ to 3.94% aided by pick up in retail loan growth and strong accretion in CASA deposits. The bank aspires to achieve ~40% CASA mix and ~4% NIM over the medium term as it increases its branch network to 1,200 (from 1,000 currently), benefits from the revival in high yielding CV loans and maintain its SA growth momentum. Loan growth accelerates; retail mix stays at ~41% (48% incl. business banking): IIB reported 28.5% YoY growth in the loan portfolio led by 6.7% QoQ growth in its retail portfolio. This was aided by continued traction in CV/car loans, credit card, LAP and personal loans portfolio. Share of consumer loan portfolio remained at 41% (48% incl. biz banking) and helped boost margins. Corporate portfolio grew 8.2% QoQ led by 14.7% QoQ growth in large corporate portfolio. Management sounded positive on the economic outlook and guided for 25 30% loan growth for FY17E with retail share to contribute equally. Asset quality broadly stable; maintain IIB as one of our top picks: IIB reported 38% QoQ rise in GNPL led by 21% QoQ growth in slippages in consumer portfolio. IIB also sold loans worth Rs400mn to ARC, while also recovered Rs300mn. Provisions stood slightly higher than estimated and enabled IIB to maintain relatively stable coverage ratio at 59% (126bps QoQ decline) while restructured portfolio declined 5bp to 0.53% of loans. The Bank did not witness any AQR related slippages (in Q3FY16 had recognized 1 a/c). We maintain our PT at Rs1,050 based on 2.9x Sep 2017E ABV and retain our Accumulate rating. Key financials ( Y/e March) 2015 2016E 2017E 2018E Net interest income 34,203 45,166 57,490 72,848 Growth (%) 18.3 32.1 27.3 26.7 Operating profit 30,982 41,414 53,276 69,674 PAT 17,937 22,865 30,067 39,726 EPS (Rs) 34.0 40.7 50.5 66.8 Growth (%) 26.6 19.6 24.3 32.1 Net DPS (Rs) 4.0 4.3 5.0 5.5 Profitability & Valuation 2015 2016E 2017E 2018E NIM (%) 3.44 3.59 3.68 3.77 RoAE (%) 18.2 16.2 15.9 18.0 RoAA (%) 1.80 1.82 1.93 2.06 P / BV (x) 5.0 3.3 2.9 2.5 P / ABV (x) 5.1 3.4 3.0 2.5 PE (x) 28.6 23.9 19.2 14.6 Net dividend yield (%) 0.4 0.4 0.5 0.6 Source: Company Data; PL Research Q4FY16 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
NII growth beat estimates with robust growth of ~37% YoY on back of margin improvement Core fee income growth continues to be strong at 27% YoY mainly from loan processing fees from all product lines, while except for general banking fees and TPD fees all items contributed to growth Opex was slightly up as the bank opened 95 branches sequentially Credit cost remained stable at 17bps (68bps annualized) on slight asset quality spike Loan growth continues to remain robust at ~29% YoY & ~7% QoQ. IIB continues to see good traction in both corporate book & consumer finance book. Within CF book non vehicle retail is catching with higher growth. Margins continue to improve on back of reducing cost of funds and despite some reduction in yield especially in consumer book Asset quality saw slight deterioration mainly contributed from consumer book. The Bank also sold loans worth Rs400mn to ARC, while also recovered Rs300mn on the same Exhibit 1: Q4FY16 Results Buoyed performance continues, minor issues in asset quality P&L Q4FY16 Q4FY15 YoY gr. (%) Q3FY16 QoQ gr.%) Interest Income 31,317 25,790 21.4 29,277 7.0 Interest Expense 18,635 16,538 12.7 17,543 6.2 Net interest income (NII) 12,682 9,251 37.1 11,734 8.1 Treasury income 1,386 899 54.2 1,131 22.6 Fee income 7,742 5,686 36.2 7,259 6.7 Other income 9,128 6,585 38.6 8,390 8.8 Total income 21,810 15,836 37.7 20,124 8.4 Operating expenses 10,298 7,331 40.5 9,514 8.2 Staff expenses 3,364 2,654 26.8 3,267 3.0 Other expenses 6,934 4,677 48.3 6,247 11.0 Operating profit 11,512 8,505 35.4 10,610 8.5 Core operating profit 10,126 7,606 33.1 9,479 6.8 Total provisions 2,137 1,074 98.9 1,771 20.7 Profit before tax 9,375 7,431 26.2 8,839 6.1 Tax 3,172 2,478 28.0 3,029 4.7 Profit after tax 6,204 4,953 25.3 5,810 6.8 Deposits 930,003 741,344 25.4 864,230 7.6 Advances 884,193 687,882 28.5 821,670 7.6 Gross NPL (Rs m) 7,768 5,629 38.0 6,811 14.0 Net NPL (Rs m) 3,218 2,105 52.9 2,733 17.7 Restructured adv. (Rs m) 4,686 3,646 28.5 4,766 (1.7) Profitability ratios RoAA 1.9 1.9 (1) 1.9 (2) RoAE 14.6 19.8 (523) 14.1 51 NIM 3.9 3.7 26 3.9 3 Yield on Advances 12.0 12.8 (73) 12.1 (3) Cost of Deposits 7.1 7.7 (62) 7.2 (9) Asset Quality ratios Gross NPL ratio 0.9 0.8 6 0.8 5 Net NPL ratio 0.4 0.3 5 0.3 3 Coverage ratio 58.6 62.6 (403) 59.9 (129) % restructured adv. 0.5 0.5 0.6 (5) Business & Other Ratios Low cost deposit mix 35.2 34.1 106 35.0 21 Cost income ratio 47.2 46.3 92 47.3 (6) Non int. inc / total income 41.9 41.6 27 41.7 16 Credit deposit ratio 95.1 92.8 229 95.1 (0) CAR 15.5 12.1 341 16.4 (93) Tier I 14.9 11.2 370 15.6 (72) April 21, 2016 2
Q4FY16 Analyst Meet Takeaways Balance sheet growth and Outlook: Loan book Outlook: Loan book will continue to grow at 25 30% of which ~50% will be contributed by consumer book Retail loan book Vehicle book continues to grow strong mainly contributed from CV & passenger cars. Disbursed Rs27.5bn in CV segment v/s Rs20bn in Q4FY15 mainly from strong growth in M&HCV segment. Core retail (non vehicle) continues to show case high growth mainly in credit cards, LAP & PL and now share has further inched up to 10% of loan book Large corporate book Have seen some increase in exposure to metal (govt companies) & infra EPC segments. Lending is opportunity based mainly on working capital, while witnessing strong throughput and hence have sold off Rs10bn of loans (v/s Rs7bn in Q3FY16). Gems & Jewellery business (acquired book) Remains an EPS accretive book. Margins in this business are ~5 5.5%, while ROAs from the business are ~4%. CASA Overall CASA share has been maintained at 35.2%, while growth continues to be robust mainly from the SA side. Margins: Margins continue to move upwards with 3bps QoQ increase to 3.94% as capital raising benefit & CASA traction has lowered cost of funds. Outlook Bank continues to target NIMs of 4% in the medium term, going ahead. MCLR regime will have lower impact on margins on flexibility in pricing to customers. Fees, Opex and Branch expansion: Fee income continues to be strong mainly from loan processing fees as loan growth remains strong, while remittances/fx & IB fees continue as well. Bank witnessed some slowdown in growth in third party distribution fees as MF business was robust in Q4FY15. Outlook Management expects fee income growth will remain above balance sheet growth, while insurance tie up with TATA AIA has started to give expected results and could see adding to TPD fees. Asset quality: Slippages Bank saw Rs2.74bn of slippages which was slightly higher sequentially. Increase was mainly from some slippages from the consumer finance book. The Bank did not witness any AQR related slippages in Q4FY16. Credit cost was stable at 17bps (68bps annualized) in Q4FY16 and ~58bps in FY16 which was within indicated guidance. Outlook Continue to remain comfortable on credit cost guidance of 60bps for FY16. April 21, 2016 3
Exhibit 2: Both corporate and consumer book showcasing strong growth; core retail share inching up to 10% of total loans Loan Book mix Q4FY16 Q4FY15 YoY gr. (%) Q3FY16 QoQ gr. (%) CV Loans 141,010 106,180 32.8 123,600 14.1 UV Loans 20,580 20,170 2.0 20,370 1.0 3W/Small CV 20,450 18,430 11.0 19,380 5.5 2W Loans 30,450 28,080 8.4 28,570 6.6 Car Loans 39,170 31,460 24.5 35,390 10.7 Equipment Financing 32,440 28,160 15.2 28,610 13.4 Credit Card 12,040 6,980 72.5 8,850 36.0 Others/LAP 69,350 44,660 55.3 54,780 26.6 Consumer Finance 365,490 284,120 28.6 319,550 14.4 Corporate Finance 518,700 403,760 28.5 463,390 11.9 Reported NIMs continue to move up by 3bps QoQ to 3.94% to clock highest ever margins as reducing cost of funds benefit from stable CASA growth & re financing of deposits. Management continues to target 4% NIMs, going ahead Exhibit 3: Margins reach highest ever mark, inch up further towards 4% Yield on Advances (%) Cost of Funds (%) NIM RHS (%) 16.0% 4.00% 14.0% 3.80% 12.0% 3.60% 10.0% 8.0% 3.40% 6.0% 3.20% 4.0% 3.00% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Exhibit 4: Core fees: All fees lines except TPD & general banking fees contribute to strong fee income especially from loan processing fees 6,000 5,000 4,000 Trade & Remittance Fx Income TPP Distribution Income General banking fees Invt banking Loan processing fees 3,000 2,000 1,000 0 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 (Rs m) April 21, 2016 4
Exhibit 5: Asset quality see marginal deterioration mainly from consumer book GNPA (%) NNPA (%) PCR (%) RHS 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% Exhibit 6: Credit cost remained stable at 68bps annualized (57bps in FY16) well within guidance 0.75 0.70 0.65 0.60 0.55 0.50 0.45 0.40 0.35 0.30 Credit Cost (bps) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Exhibit 7: Change in estimates We increase our core performance estimates on back of improving NIMs & sustained credit growth, while tweak our credit cost assumptions slightly Rs (m) Old Revised % Change FY17E FY18E FY17E FY18E FY17E FY18E Net interest income 57,084 72,369 57,490 72,848 1 1 Operating profit 53,204 69,525 53,276 69,674 0 0 Net profit 30,155 39,766 30,067 39,726 (0) (0) EPS, Rs. 50.8 66.9 50.5 66.8 (0.5) (0.3) ABV per share, Rs. 326.2 383.5 328.1 387.5 0.6 1.0 Price target, Rs. 1,050 1,050 Recommendation Accumulate Accumulate Exhibit 8: We maintain our TP of Rs1,050 based on Sep 17 adj. book PT calculation and upside Fair price EVA, Rs 1,063 Fair price P/ABV, Rs 1,037 Average of the two, Rs 1,050 Target P/ABV (x) 2.9 Target P/E (x) 17.9 Current price, Rs 972 Upside (%) 8% Dividend yield (%) 0% Total return (%) 8% April 21, 2016 5
Exhibit 9: ROAs to move above to ~2% in FY18 RoA decomposition (%) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Interest income 8.86 10.38 10.67 10.30 9.75 9.20 9.35 9.34 Interest expenses 5.46 7.08 7.26 6.69 6.31 5.61 5.66 5.57 Net interest income 3.40 3.30 3.41 3.61 3.44 3.59 3.68 3.77 Treasury income 0.48 0.57 0.60 0.83 0.84 0.64 0.60 0.60 Other Inc. from operations 1.28 1.39 1.48 1.52 1.58 1.98 2.13 2.26 Total income 5.16 5.26 5.49 5.96 5.86 6.21 6.41 6.62 Employee expenses 0.94 0.94 1.01 1.01 0.99 0.98 0.99 0.99 Other operating expenses 1.55 1.66 1.67 1.72 1.76 1.93 2.01 2.03 Operating profit 2.67 2.66 2.81 3.24 3.12 3.29 3.41 3.60 Tax 0.75 0.76 0.79 0.90 0.92 0.94 0.99 1.06 Loan loss provisions 0.50 0.35 0.40 0.58 0.39 0.53 0.49 0.49 Net profit 1.43 1.55 1.62 1.76 1.80 1.82 1.93 2.06 Exhibit 10: Valuations have narrowed down in last few months 4.5 P/ABV 3 yr avg. avg. + 1 SD avg. 1 SD 4.0 3.5 3.0 2.5 2.0 1.5 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 April 21, 2016 6
Income Statement (Rs m) Int. Earned from Adv. 77,169 92,446 119,265 150,170 Int. Earned from Invt. 15,877 17,806 23,330 26,028 Others 3,874 5,555 3,272 4,262 Total Interest Income 96,920 115,807 145,867 180,460 Interest expense 62,717 70,641 88,376 107,612 NII 34,203 45,166 57,490 72,848 Growth (%) 18.3 32.1 27.3 26.7 Treasury Income 1,158 750 750 750 NTNII 22,881 32,220 41,847 54,455 Non Interest Income 24,039 32,970 42,597 55,205 Total Income 120,958 148,776 188,463 235,665 Growth (%) 19.2 23.0 26.7 25.0 Operating Expense 27,259 36,721 46,811 58,379 Operating Profit 30,982 41,414 53,276 69,674 Growth (%) 19.3 33.7 28.6 30.8 NPA Provisions 3,389 4,716 6,214 7,636 Investment Provisions (664) 332 66 13 Total Provisions 3,891 6,722 7,720 9,483 PBT 27,092 34,693 45,556 60,191 Tax Provisions 9,155 11,828 15,489 20,465 Effective Tax Rate (%) 33.8 34.1 34.0 34.0 PAT 17,937 22,865 30,067 39,726 Growth (%) 27.4 27.5 31.5 32.1 Balance Sheet (Rs m) Par Value 10 10 10 10 No. of equity shares 529 595 595 595 Equity 5,295 5,950 5,950 5,950 Networth 106,305 176,822 202,293 238,080 Adj. Networth 104,201 173,605 199,106 234,492 Deposits 741,344 930,000 1,160,640 1,457,764 Growth (%) 22.5 25.4 24.8 25.6 Low Cost deposits 252,996 327,240 424,794 546,661 % of total deposits 34.1 35.2 36.6 37.5 Total Liabilities 1,117,870 1,400,432 1,720,145 2,145,866 Net Advances 687,882 884,190 1,120,269 1,424,982 Growth (%) 24.8 28.5 26.7 27.2 Investments 228,780 312,140 336,711 387,181 Total Assets 1,117,869 1,400,570 1,720,145 2,145,866. Quarterly Financials (Rs m) Y/e March Q1FY16 Q2FY16 Q3FY16 Q4FY16 Interest Income 27,235 27,977 29,277 31,317 Interest Expense 17,428 17,035 17,543 18,635 Net Interest Income 9,807 10,942 11,734 12,682 Non Interest Income 7,243 7,835 8,390 9,128 CEB 5,989 6,733 7,259 7,742 Treasury 1,254 1,102 1,131 1,386 Net Total Income 17,050 18,778 20,124 21,810 Operating Expenses 7,823 8,713 9,514 10,298 Employee Expenses 2,723 3,007 3,267 3,364 Other Expenses 5,100 5,706 6,247 6,934 Operating Profit 9,227 10,065 10,610 11,512 Core Operating Profit 7,973 8,962 9,479 10,126 Provisions 1,233 1,581 1,771 2,137 Loan loss provisions 912 1,204 1,414 1,485 Investment Depreciation Profit before tax 7,994 8,484 8,839 9,375 Tax 2,744 2,884 3,029 3,172 PAT before EO 5,250 5,600 5,810 6,204 Extraordinary item PAT 5,250 5,600 5,810 6,204 Key Ratios CMP (Rs) 972 972 972 972 Equity Shrs. Os. (m) 529 595 595 595 Market Cap (Rs m) 514,679 578,390 578,390 578,390 M/Cap to AUM (%) 46.0 41.3 33.6 27.0 EPS (Rs) 34.0 40.7 50.5 66.8 Book Value (Rs) 194 291 333 394 Adj. BV (100%) (Rs) 190 285 328 388 P/E (x) 28.6 23.9 19.2 14.6 P/BV (x) 5.0 3.3 2.9 2.5 P/ABV (x) 5.1 3.4 3.0 2.5 DPS (Rs) 4.0 4.3 5.0 5.5 Dividend Yield (%) 0.4 0.4 0.5 0.6 Profitability (%) NIM 3.4 3.6 3.7 3.8 RoAA 1.8 1.8 1.9 2.1 RoAE 18.2 16.2 15.9 18.0 Efficiency Cost Income Ratio (%) 46.8 47.0 46.8 45.6 C D Ratio (%) 92.8 95.1 96.5 97.8 Business per Emp. (Rs m) 80 88 96 106 Profit per Emp. (Rs lacs) 10.0 11.1 12.7 14.6 Business per Branch (Rs m) 2,042 2,134 2,281 2,883 Profit per Branch (Rs m) 26 27 30 40 Asset Quality Gross NPAs (Rs m) 5,629 7,768 8,469 10,607 Net NPAs (Rs m) 2,104 3,217 3,187 3,588 Gr. NPAs to Gross Adv. (%) 0.8 0.9 0.8 0.7 Net NPAs to Net Adv. (%) 0.3 0.4 0.3 0.3 NPA Coverage (%) 62.6 58.6 62.4 66.2. April 21, 2016 7
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Marg, Worli, Mumbai 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage PL s Recommendation Nomenclature % of Total Coverage 60% 50% 40% 30% 20% 10% 0% 48.2% 38.4% 13.4% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Nitin Kumar (B.E, PGDM, CFA), Mr. Pritesh Bumb (MBA, M.com), Ms. Vidhi Shah (CA), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. 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