Result Update Rating matrix Rating : Buy Target : 1350 Target Period : 12 months Potential Upside : 11% What s Changed? Target Changed from 1250 to 1350 EPS FY17E Unchanged EPS FY18E Changed from 61.1 to 61.2 Rating Unchanged Quarterly Performance Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%) NII 1,460.3 1,094.3 33.4 1,356.4 7.7 Other income 970.4 783.5 23.9 973.0-0.3 PPP 1,281.7 1,006.5 27.3 1,233.8 3.9 PAT 704.3 560.0 25.8 661.4 6.5 Key Financials Crore FY15 FY16 FY17E FY18E NII 3,420.3 4,517.6 5,678.8 6,890.6 PPP 3,098.2 4,178.8 5,187.8 6,314.8 PAT 1,794.1 2,285.4 2,944.1 3,639.0 Valuation summary FY15 FY16 FY17E FY18E P/E 36.0 31.8 24.7 20.0 Target P/E 36.9 32.5 25.3 20.4 P/ABV 6.2 4.1 3.6 3.2 Target P/ABV 6.4 4.2 3.7 3.2 RoE 18.2 15.9 15.3 16.5 RoA 1.8 1.9 1.9 2.0 Stock data Market Capitalisation 72722 Crore GNPA (Q2FY17) 899 Crore NNPA (Q2FY17) 369 Crore NIM (%) (Q2FY17) 4.00 52 week H/L 1255 /799 Net worth 19115 Crore Face Value 10 DII Holding (%) 11.6 FII Holding (%) 43.8 Price performance (%) Return % 1M 3M 6M 12M Yes Bank 0.3 14.2 50.6 76.3 Axis Bank -13.3-2.7 26.1 8.4 Indusind Bank 0.3 8.4 30.3 29.9 Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com Another steady performance... October 13, 2016 IndusInd Bank (INDBA) 1220 IndusInd Bank s operating performance continued to remain strong with 25.8% YoY PAT growth to 704 crore. The bank remains one of the few banks delivering consistently on the operational front Advances growth continued to remain strong at 26.4% YoY to 98949 crore (I-direct estimate: 99596 crore). Among segments, consumer finance as well as corporate segment growth remained healthy at 27% and 26% YoY, respectively. In consumer finance, non vehicle loans (including credit cards, LAP and personal loan) grew at a faster rate above 35% Asset quality remained stable during the quarter. Total slippages remained flattish at 261 crore, mainly led by lower slippages from the corporate segment at 73 crore vs. 94 crore in Q1FY17. However, slippage from consumer segment increased to 188 crore vs. 159 crore QoQ. The restructured book reduced from 0.49% of advances in Q1FY17 to 0.44%, due to slippage of an account to NPA Turnaround done successfully; growth ahead of industry to sustain After taking over in early 2008, the current management has transformed IndusInd Bank (IIB) from low and volatile B/S growth to steady and sustainable growth with strong profitability. We like the fact that the transformation has been a qualitative one (RoA up from 0.3% to 1.9% as on FY16) despite the turbulent economic scenario. The loans, deposits and PAT traction improved to 27%, 22% and 53% CAGR in FY08-16 from 12%, 13% and -35% in FY05-08, respectively. The loan and deposit grew 29.7% and 31% to 93678 crore and 101768 crore, respectively, as on Q1FY17. IIB s loan mix is 41.2% consumer finance (CF) (~80% of which is high vehicle financing) and 58.8% corporate banking (CB) (working capital in nature and well diversified across industries). We factor in 25% loan CAGR over FY16-18E to 138210 crore. Healthy NIMs to stay with rising CF book IIB maintained calculated NIM of over 3.7% in the past while Q1FY17 NIM was at an all-time high of 4%. In the past six years, reported NIM improved from 1.7% to 3.8% as on FY16. Such a structural improvement was led by an improvement in CASA franchise (doubled to >30% in the past six years), helping keep CoF under control across various cycles. The impact of MCLR is seen as minimal with 72% of the book being fixed. With a strong liability franchise and rising CF proportion, we expect calculated NIM to stay healthy at ~4% by FY18E. Diversified asset book enables superior asset quality IIB has fared well over the years in terms of asset quality with the GNPA ratio improving from 3.1% in FY08 to 1% by FY11 and maintained at 0.9% now. Diversification led to a steady performance on the asset quality front. Concerns surrounding the CV portfolio (16% of loans) are receding. Going ahead, we expect GNPA ratio to remain steady at 1% by FY18E. Multiple re-rating led by consistency & strong earning visibility; BUY IIB has continued to deliver a strong performance leading to continuous re-rating in multiple. Normalised return ratios of ~18% RoE and 2% RoA provide comfort. We largely maintain our estimates and expect PAT to grow at 26.2% CAGR to 3639 crore by FY18E. The bank is well placed to benefit from higher business momentum maintaining stable margin and lower capital usage, which will entail improvement in return ratios. Therefore, we revise our target price higher to 1350 from 1250 earlier assigning higher multiple of 3.5x FY18E ABV. We recommend BUY. ICICI Securities Ltd Retail Equity Research
Variance analysis Q2FY17 Q2FY17E Q2FY16 YoY (%) Q1FY17 QoQ (%) Comments NII 1,460 1,422 1,094 33.4 1,356 7.7 NII traction led by healthy advance growth as well as margin improvement NIM (%) 4.00 3.80 3.88 12 bps 3.97 3 bps Margins continued on their improving trajectory on a QoQ basis. Going ahead, the management expects margins to stay strong owing to decling system rates and 72% of assets being fixed rate Other Income 970 1,006 784 23.9 973-0.3 Core income growth remained healthy at 22.6% YoY Net Total Income 2,431 2,428 1,878 29.4 2,329 4.4 Staff cost 376 371 301 25.0 357 5.3 Other Operating Expenses 773 776 571 35.5 739 4.7 Operating expenses were higher as the bank is investing in technology. The benefits would accrue by FY18E in terms of a decline in cost to income ratio from 47% levels currently PPP 1,282 1,281 1,007 27.3 1,234 3.9 Provision 214 242 158 35.3 230.5-7.2 Credit cost stood at 15 bps, same QoQ PBT 1,068 1,039 848 25.9 1,003 6.4 Tax Outgo 364 344 288 26.0 341.9 6.3 PAT 704 695 560 25.8 661.4 6.5 Key Metrics Slippages increased marginally at 261 crore vs 253 crore in Q1FY17. Sale to ARCs in GNPA 899 964 602 49.3 860.6 4.5 Q2FY16 was 41 crore. One account slipped from the restructured book in Q2FY17 NNPA 369 409 241 53.3 355.5 3.8 PCR was maintained at 59% Total Restructured assets 435 425 493-11.7 459.0-5.2 Restructured loans as a percentage of total credit improved further to 0.44% from 0.49% as on Q1FY17, led by slippage of one account in NPA Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Net Interest Income 5,678 5,679 0.0 6,895 6,891-0.1 Pre Provision Profit 5,186 5,188 0.0 6,312 6,315 0.0 NIM(%) (calculated) 4.0 4.0-1 bps 4.0 4.0-2 bps PAT 2,945 2,944 0.0 3,638 3,639 0.0 ABV per share ( ) 337.6 337.5 0.0 383.0 382.9 0.0 Assumptions Current Earlier FY15 FY16 FY17E FY18E FY17E FY18E Credit growth (%) 24.8 28.5 24.5 25.5 23.9 25.6 Deposit Growth (%) 22.5 25.5 25.2 25.2 22.9 23.5 CASA ratio (%) 34.1 35.2 36.1 36.8 36.4 37.1 NIM Calculated (%) 3.8 4.0 4.0 4.0 4.0 4.0 Cost to income ratio (%) 46.8 46.5 46.0 45.3 46.0 45.3 GNPA ( crore) 562.9 775.1 1,050.3 1,451.1 1,049.0 1,448.1 NNPA ( crore) 210.5 321.0 404.5 709.2 404.0 707.6 Slippage ratio (%) 1.6 1.2 0.8 0.8 0.8 0.8 Credit cost (%) 0.6 0.8 0.6 0.5 0.6 0.5 ICICI Securities Ltd Retail Equity Research Page 2
Company Analysis Ideal loan book; better than industry growth to stay... IIB s total credit book as on FY16 was at 88419 crore. The credit traction has been strong at 27% CAGR in the past six years and way ahead of the industry, which grew at 18% CAGR. The composition/mix of the loan book is ideal with the consumer finance (CF) book and corporate banking book (CB book) accounting for 41.3% and 58.7%, respectively, as on FY16. Excluding the ~ 4100 crore acquired diamond portfolio, the CF proportion is 43%. The bank has guided at maintaining 1:1 distribution of the total loan between CF and CB book, going ahead. Thus, CF book could witness higher traction led by CV financing and non-vehicle loans. We expect advances growth to stay well above the system at 25% CAGR over FY16-18E to 138210 crore The CF book, amounting to 40558 crore as on Q2FY17, is well diversified (see exhibit 1) but remains largely vehicle finance focused (~80% of CF book). Going forward, we expect the CF book to be a major driver of overall loan book traction. We factor in 30% CAGR in the CF book over FY16-18E to 62094 crore. Exhibit 1: CV portfolio expected to witness further up tick in H2FY17E Consumer Finance Book crore FY14 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Comm. Vehicle 9,614 10,618 11,405 12,360 13,204 14,101 13,847 14,208 Utility Vehicle 2,050 2,017 2,043 2,037 2,041 2,058 2,097 2,157 Three Wheelers 1,932 1,843 1,860 1,938 2,019 2,045 2,133 2,274 Two Wheelers 2,512 2,808 2,829 2,857 3,034 3,045 3,076 3,134 Car loans 2,642 3,146 3,293 3,539 3,754 3,917 4,076 4,324 Equip. financing 2,854 2,816 2,827 2,861 3,036 3,244 3,435 5,057 Credit card 457 698 786 885 1,008 1,204 1,258 1,408 Loan against prop. 2,473 3,705 4,032 4,331 4,759 5,248 5,585 5,872 Personal.others etc 251 761 932 1,147 1,393 1,687 1,855 2,124 Total 24,785 28,412 30,007 31,956 34,249 36,549 38,591 40,558 YoY Growth 11 15 18 23 27 29 29 27 IIB s CB book at 58391 crore as on Q2FY17 is largely inclined towards working capital finance. Further, the book is broadly diversified into three major categories (see exhibit 1) such as large corporate, mid-corporate and loans to small business. Again, in terms of sectors, the CB portfolio is well diversified among 13-14 sectors. We expect the CB book to post a CAGR of 21.1% over FY16-18E to 76116 crore. During Q2FY16, traction in the mid-corporate segment looks higher at 58% YoY as the bank incorporated the gems & jewellery portfolio of 4100 crore that was acquired from RBS. IIB already has such a portfolio around 1500 crore. With this acquisition, the bank becomes one of the largest financiers in this segment across industry. During Q2FY17, the corporate book grew 26% YoY to 58391 crore led by large corporate segment. Exhibit 2: Break up of corporate book Corporate Banking Book crore FY14 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Large corporates 15,086 19,964 21,475 20,785 22,022 25,258 27,323 27,588 Mid corporates 9,693 11,455 11,885 16,135 16,042 16,624 17,119 19,284 Small business 5,538 8,957 8,876 9,419 9,854 9,988 10,645 11,519 Total 30,317 40,376 42,236 46,339 47,918 51,870 55,087 58,391 YoY Growth 38.3 33.2 26.8 36.4 30.1 28.5 30.4 26.0 We expect the loan book traction to stay ahead of industry at 25% CAGR over FY16-18E. ICICI Securities Ltd Retail Equity Research Page 3
Exhibit 3: Overall advances growth expected to be ahead of industry crore FY14 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Total Advances 55102 68788 72243 78294.5 82167 88419 93678 98949 YoY Growth 24.3 24.8 23.1 30.6 28.7 28.5 29.7 26.4 We expect CASA CAGR of 28.1% over FY16-18E at 53664 crore and expect CASA ratio at 36.8% Impressive improvement in liability franchise IIB s deposits also witnessed a sharp traction of 22% CAGR in FY08-16 to 93000 crore. More notable is the improvement in quality of the liability franchise. The CASA ratio in the period has doubled to 35.2% of deposits currently owing to a rising branch presence (up from 210 in FY10 to over 1000 as on FY16), innovative services & SA deregulation in Q2FY12. Going ahead, we expect the deposit base to increase at 25.2% CAGR in FY16-18E to 145730 crore. We have built in a CASA CAGR of 28.1% in FY16-18E to 53664 crore, and expect the CASA ratio at 36.8%. A major upside to our CASA ratio estimates could be the opening up of the agency business of the RBI, which would lead to a sharp increase in CA balances for the bank. Currently, it is restricted to only a few large banks. High growth in deposits of 38.9% YoY during Q2FY17 was led by overall increase in deposits. However, surge in current balance was seen on account of buyback event of one PSU. Exhibit 4: Deposit traction remains healthy Crore FY14 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Savings 9,915 12,944 14,016 15,046 16,125 17,246 19,091 20,567 Current 9,776 12,356 12,929 13,039 14,107 15,478 15,952 20,467 Term 40,811 48,835 50,748 52,755 56,191 60,276 66,725 71,279 Total Deposits 60,502 74,134 77,693 80,840 86,423 93,000 101,768 112,313 YoY Growth 11.8 22.5 21.6 22.5 24.6 25.4 31.0 38.9 CASA Amount 19,691 25,300 26,945 28,085 30,232 32,724 35,043 41,034 CASA% 32.5 34.1 34.7 34.7 35.0 35.2 34.4 36.5 Source: Company quarterly presentation, ICICIdirect.com Research Margins to stay among best in class IIB s FY16 calculated NIM of 3.97% is highest after HDFC Bank and Kotak Mahindra Bank. We expect calculated NIMs to improve further over FY16-18E owing to enhanced growth in the CF book led by CV financing and a further improvement in the CASA franchise. The high yielding nature of the loan book as well as healthy CASA franchise has enabled IIB to maintain such strong margins of ~3.6-3.7% for the past four years. In consumer financing, blended yields are ~15% while in the corporate space yields are at ~10-11%. In the past four or five years, strong growth in the CASA franchise has helped manage to keep CoF (calculated) in the range of 8.0-8.3% across cycles. In Q2FY17, NIMs have increased ~3 bps QoQ to reach the 4% mark despite ~7 bps decline in yield on loans, led by a higher fall in cost of deposit, further aided by increasing CASA. The management remains confident of maintaining quarterly NIMs at healthy levels. In a falling interest rate scenario, having ~72% of the loan book on fixed rate augurs well for IndusInd Bank s margins. ICICI Securities Ltd Retail Equity Research Page 4
Exhibit 5: Margins to stay healthy supported by improving CASA franchise and changing loan mix We have factored in calculated NIMs of ~4% for FY17E 14 12 10 10.35 9.67 9.88 11.46 11.66 11.26 10.80 10.18 9.97 9.81 (%) 8 6 8.21 6.44 6.19 8.04 8.29 7.73 7.40 6.74 6.55 6.38 4 2 0 3.17 3.79 3.65 3.73 3.94 3.81 3.97 4.03 4.00 2.06 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E NIM (calculated) Yield on average assets (calculated) CoF(calculated) Source: Company quarterly presentation, ICICIdirect.com Research * YoA =yield on assets, CoF = cost of funds Diversified book enables superior asset quality The asset quality of IIB has fared well over the years. GNPA and NNPA ratios have declined from 3.1% and 2.3% in FY08 to 1% and 0.3% by FY11, respectively. They remain at these levels currently. The steady performance is owing to IIB s peculiar loan mix. The CB book mainly consists of loans towards working capital, which is less risky than term loans. Further, the CB book is well diversified with exposure to stressed sectors such as iron & steel, commercial real estate (CRE), power, etc, at lower levels of ~1-2%. Also, the asset quality has been manageable in the CF book, which constitutes the balance half. In absolute terms, GNPA and NNPA were at 899 crore and 369 crore, respectively, as on Q2FY17. Restructured assets (RA) were at 435 crore as on Q2FY17 accounting for only 0.44% of total loan book, which is one of the lowest in the industry. During Q2FY17, Total slippages remained flattish at 261 crore, mainly led by lower slippages from the corporate segment at 73 crore vs. 94 crore in Q1FY17. However, slippage from consumer segment increased at 188 crore vs. 159 crore QoQ. Going ahead, we expect absolute GNPA and NNPA of 1451 crore and 709 crore, respectively, as on FY18E. Despite this, IIB s asset quality remains manageable and appears better than the system. Exhibit 6: Asset quality remains acceptable Credit cost is also expected to be in the guided range of 60-70 bps over FY16-18E. We expect GNPA and NNPA ratios of 1.0% and 0.5%, respectively, by FY18E ( Crore) 1,600 1,400 1,200 1,000 800 600 400 200-1451 1.2 1.1 1.0 1.0 1.0 1.0 0.8 1.0 1.0 0.9 1050 0.8 0.8 0.8 0.8 0.8 775 681 0.5 621 0.6 563 570 602 563 0.3 458 709 347 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.4 0.4 0.3 0.4 266 405 0.2 73 95 137 184 210 225 241 273 210 321 0.0 FY11 FY12 FY13 FY14 FY15 Q1FY16Q2FY16Q3FY16FY15E FY16 FY17E FY18E (%) GNPA NNPA GNPA ratio (RHS) NNPA ratio (RHS) Source: Company quarterly press release and annual report, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 5
Fee income: well diversified & growing at strong pace IIB s other income constitutes ~40% of its operating income. In other income, the major component is the fee income that accounts for ~90%. Various sources of fee income include trade & remittances, forex income, distribution fees, general banking, processing fees & investment banking (IB). The bank also has a tie-up with HDFC Ltd for sourcing home loans on its behalf for which it gets commission of ~1% and additional 0.2% in insurance. The other income witnessed a strong CAGR of 35%. In that, core fee income grew at 39% CAGR in the last four years to 2772 crore, as on FY16. The management has guided that fee income growth is likely to normalise in line with loan growth. We have factored in total other income CAGR of 19% to 4656 crore over FY16-18E. Exhibit 7: Core fee income trend continues to be strong at 24% YoY in Q2FY17 Other income break up ( Crore) FY11 FY12 FY13 FY14 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Core fee income 629 913 1,239 1,610 636 673 726 774 782 826 Securities/FX tradingothers 85 92 107 263 125 110 113 139 191 145 Break up of fee income ( Crore) FY11 FY12 FY13 FY14 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Trade & Remittances 88 118 169 214 56 84 85 97 109 103 Foreing Exchange Income 111 201 285 435 159 170 170 140 151 156 Distribution Fees 161 245 270 281 107 119 126 138 137 156 General Banking 88 110 139 145 49 41 46 48 56 49 Loan Processing Fees 124 161 233 291 104 145 185 228 215 201 Investment Banking 58 79 143 242 123 114 113 122 114 161 Total 629 913 1,239 1,610 599 673 726 774 782 826 Source: Company quarterly presentation, ICICIdirect.com Research Exhibit 8: Expanding branch and ATM network 2500 The bank added 199 new branches in FY16. Under Planning Cycle III, over FY14-17, the bank plans to double its branch network to ~1200 2000 1500 1000 500 594 300 692 400 500 882 1110 1238 1800 1885 1935 1277 1277 1487 1543 1578 1621 602 638 685 727 801 811 854 905 1000 1004 1035 0 FY11 FY12 FY13 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Branches ATM Source: Company quarterly presentation, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 6
Outlook and valuation In the past three or four years, IIB has traded at premium valuations compared to its private sector counterparts, except HDFC Bank and Kotak Mahindra Bank. This is due to a sustained and structural improvement in earnings (up 3x in the last four years) and best in class return ratios with RoE of ~18-19% and RoA of 1.6% in the past four years. Further, the major factor on the back of which the stock got re-rated from time to time was that such a strong performance has been accomplished in a strained economic environment wherein the banking system has been plagued by declining growth and increasing deterioration in asset quality. IIB, owing to its ideal mix of the loan book (niche presence in vehicle finance), improving CASA franchise and lower exposure to stressed sectors was able to ring fence itself from major systemic concerns and deliver strong results. IIB continued to deliver a strong performance relative to peers despite a weak economy in the past two or three years. This is clearly reflected in the continuous re-rating in its multiple. Normalised return ratios of ~18% RoE and 2% RoA provide comfort. We have factored in capital raised (~ 5100 crore) in June 2015, which was book value accretive by ~22%, while the RoE is declined ~350 bps to 16%. We largely maintain our estimates and expect PAT to grow at 26.2% to 3639 crore by FY18E. We remain positive on the fundamentals as the bank is well placed to benefit from higher business momentum maintaining stable margin and lower capital usage, which will entail an improvement in return ratios. Therefore, we revise our target price higher to 1350 from 1250 earlier assigning higher multiple of 3.5x FY18E ABV. We recommend BUY. Exhibit 9: Valuation NII Growth PAT Growth P/E ABV P/ABV RoA RoE ( cr) (%) ( cr) (%) (x) ( ) (x) (%) (%) FY15 3,420 41.3 1,794.1 27.4 36.0 196.8 6.2 1.8 18.2 FY16 4,518 42.2 2,285.4 27.4 31.8 298.1 4.1 1.9 15.9 FY17E 5,679 40.9 2,944.1 28.8 24.7 337.5 3.6 1.9 15.3 FY18E 6,891 40.3 3,639.0 23.6 20.0 382.9 3.2 2.0 16.5 ICICI Securities Ltd Retail Equity Research Page 7
Annual Report Analysis Management s comment In the CV segment, the latter part of FY16 saw a revival in the auto segment with growth of ~4% YoY. Commercial vehicles were up 30% (vs. down 3% in FY15); sale of LCVs continued to be stagnant. In the new vehicles segment, loans for commercial vehicles registered growth of over 50% to 6900 crore. The bank s focus during the year was on optimising the product mix to maximise yields while maintaining portfolio quality. Used-vehicle loans disbursed grew 26% to 35 crore Credit cards business, acquired from Deutsche Bank in 2011, has scaled up and grown in distribution and profitability while remaining focused on the quality of customer receivables. The commercial cards business (launched in Q4FY15) has grown. It provides sophisticated payment solutions for corporate to meet critical B2B payment requirements The bank entered into a corporate agency agreement with Tata AIA Life Insurance Company. The life insurance business saw 80% YoY growth after creation of this partnership. A special focus group to serve MNC client requirements was initiated that has brought in a significant number of new-to-bank clients. The bank has built relationships with over 150 public-sector clients, including Maharatnas and Navratnas. It won large collection mandates in issues of tax-free bonds of many PSUs. It also executed several e-procurement mandates for key PSUs, providing reliable technology-based solutions. The bank was the market leader in launching the Business Correspondent Model, with microfinance institutions providing micro loans to the weak sections of society. In microfinance, the bank works with more than 2.3 million clients, of which 1.8 million have been reached directly. All of the clients are women and they were given micro loans for productive purposes. ICICI Securities Ltd Retail Equity Research Page 8
Exhibit 10: CASA ratio has crossed 35% mark... Exhibit 11: though concentration of deposits has risen ( Crore) 40000 30000 20000 10000 29.3 32.5 34.1 35.2 36.0 32.0 28.0 (%) (%) 28 26 24 0 FY11 FY12 FY13 FY14 24.0 22 FY13 FY14 FY15 FY16 CASA CASA (%) Deposit concentration (%) Source: Company, ICICIdirect.com, Research Source: Company, ICICIdirect.com, Research Exhibit 12: Asset-liability maturity (ALM) gap reduces but still high (%) 70 60 50 65 48 61 43 54 55 42 40 30 30 20 FY13 FY14 FY15 FY16 Liabilties < 1 year Assets < 1 year Source: Company, ICICIdirect.com, Research Exhibit 13: GNPA remains on lower side ( Crore) 1000 800 600 400 200 0 1.0% 1.1% 0.8% 0.9% FY13 FY14 FY15 FY16 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% (%) Exhibit 14: Doubtful assets remain high 1000 800 ( crore) 600 261 106.6 400 80.16 153.6 153.8 131 91.22 122 200 240.89 274.5 307 198 0 FY13 FY14 FY15 FY16 GNPA GNPA (%) Source: Company, ICICIdirect.com, Research Sub-standard Doubtful-1 Doubtful-2 Doubtful-3 Loss Source: Company, ICICIdirect.com, Research ICICI Securities Ltd Retail Equity Research Page 9
Recommendation history vs. Consensus ( ) 1,400 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 Sep-14 Dec-14 Feb-15 May-15 Jul-15 Oct-15 Dec-15 Mar-16 May-16 Jul-16 90.0 88.0 86.0 84.0 82.0 80.0 78.0 76.0 74.0 Oct-16 (%) Source: Bloomberg, Company, ICICIdirect.com Research Price Idirect target Consensus Target Mean % Consensus with BUY Key events Date FY04 Jan-07 Feb-08 Mar-09 Event Ashok Leyland Finance (ALF), an NBFC, merged with IndusInd Bank, which enabled it to have a niche presence in the vehicle financing space Aviva Life Insurance and IndusInd Bank announce their tie-up as bancassurance partners A new management team headed by Romesh Sobti inducted from ABN Amro Bank NV, leading to a sharp turnaround of the bank The new management focused on improving liability franchise as low cost CASA ratio improved from 15.7% in FY08 to 29.3% in FY13. On the lending side, it reduced exposure to risky segments like unsecured loans and focused on high yielding-relatively less risky segments like CV, car loans, UV, three-wheelers, LAP, etc. FY11 IndusInd Bank enters into an agreement with Deutsche Bank to acquire its credit card business in India FY11 IndusInd Bank signs an MoU with HDFC Ltd for home loans FY11 Planning Cycle I (FY08-FY11) successfully achieved; launches Planning Cycle II (FY11-14) Dec-11 Savings rate deregulation in Q3FY12 wherein IIB offers higher rates (6% above 1 lakh and 5.5% up to 1 lakh) FY13 Branch network touches 500 and launches Planning Cycle III (FY14-FY16) Apr-13 On April 1, 2013, the bank included in the Nifty 50 benchmark index May-13 IndusInd was the best performing stock in the banking industry as it rose from 45 in FY09 to all-time high of 523. Jul-13 RBI tightens liquidity by raising MSF rate by 3% and various other measures. IndusInd impacted due to its high reliance on wholesale deposits (50%) Sep-13 Arrival of new RBI Governor changes sentiment, eases a few of the tight liquidity measures due to which the stock of IndusInd bounces back Jun-15 Raises around 5000 crore via QIP (including allotment to promoters) Top 10 shareholders Rank Name Latest Filing % OS Position (m) Change (m) 1 Hinduja Group 30-Jun-2016 17.19% 102.55M -1.86M 2 Prans Asset Management, Ltd. 30-Jun-2016 3.52% 21.01M 0 3 Franklin Advisers, Inc. 30-Jun-2016 1.60% 9.55M +1.00M 4 UTI Asset Management Co. Ltd. 31-Aug-2016 1.59% 9.51M +0.02M 5 Franklin Templeton Asset Management (India) Pvt. Ltd. 30-Jun-2016 1.58% 9.41M +0.69M 6 Icon Capital Limited 30-Jun-2016 1.52% 9.10M -0.49M 7 Goldman Sachs Asset Management International 30-Jun-2016 1.35% 8.06M -0.71M 8 The Vanguard Group, Inc. 31-Aug-2016 1.34% 7.97M +0.09M 9 ICICI Prudential Life Insurance Company Ltd. 30-Jun-2016 1.19% 7.12M -0.31M 10 IIFL Inc 30-Jun-2016 1.13% 6.72M 0 Source: Reuters, ICICIdirect.com Research Recent Activity Shareholding Pattern (in %) Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Promoter 14.98 14.94 14.90 14.88 14.86 FII 35.67 29.71 43.30 43.48 43.81 DII 11.02 11.22 11.40 11.82 11.59 Others 38.33 44.13 30.40 29.82 29.74 Investor name Investor name Buys Value Shares Sells Value Shares Grantham Mayo Van Otterloo & Co LLC +47.7M +2.91M Hinduja Group -30.55M -1.86M Franklin Advisers, Inc. +16.5M +1.00M Chander (Suhail) -16.09M -0.91M Invesco Hong Kong Limited +12.08M +0.73M Goldman Sachs Asset Management International -11.70M -0.71M Franklin Templeton Asset Management (India) Pvt. Ltd. +11.37M +0.69M Columbia Threadneedle Investments (US) -9.49M -0.54M William Blair Investment Management, LLC +5.80M +0.35M Icon Capital Limited -8.10M -0.49M Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 10
Financial summary Profit and loss statement Crore (Year-end March) FY15 FY16 FY17E FY18E Interest Earned 9,692.0 11,580.5 14,061.0 16,897.6 Interest Expended 6271.7 7062.9 8382.2 10007.0 Net Interest Income 3,420.3 4,517.6 5,678.8 6,890.6 Growth (%) 18.3 32.1 25.7 21.3 Non Interest Income 2403.9 3295.8 3932.3 4655.6 Fees and advisory 1548.4 2013.0 2500.1 3080.1 Treasury Income 117.7 158.9 190.7 228.9 Other income 737.7 1123.9 1241.4 1346.6 Net Income 5824.1 7813.4 9611.1 11546.1 Employee cost 980.5 1235.7 1409.5 1564.2 Other operating Exp. 1745.5 2398.9 3013.8 3667.2 Operating Income 3098.2 4178.8 5187.8 6314.8 Provisions 389.1 673.5 693.0 733.5 PBT 2709.1 3505.2 4494.8 5581.3 Taxes 915.0 1219.8 1550.7 1942.3 Net Profit 1,794.1 2,285.4 2,944.1 3,639.0 Growth (%) 27.4 27.4 28.8 23.6 EPS ( ) 33.9 38.4 49.5 61.2 Key ratios (Year-end March) FY15 FY16 FY17E FY18E Valuation No. of shares (crore) 52.9 59.5 59.5 59.5 EPS ( ) 33.9 38.4 49.5 61.2 DPS ( ) 3.5 5.7 7.4 9.1 BV ( ) 200.8 303.5 344.3 394.8 ABV ( ) 196.8 298.1 337.5 382.9 P/E 36.0 31.8 24.7 20.0 P/BV 6.1 4.0 3.5 3.1 P/ABV 6.2 4.1 3.6 3.2 Yields & Margins (%) Net Interest Margins 3.81 3.97 4.03 4.00 Yield on assets 10.8 10.2 10.0 9.8 Avg. cost on funds 7.4 6.7 6.5 6.4 Yield on average advances 12.5 11.8 11.6 11.3 Avg. Cost of Deposits 7.7 7.0 6.7 6.6 Quality and Efficiency (%) Cost to income ratio 46.8 46.5 46.0 45.3 Credit/Deposit ratio 92.8 95.1 94.6 94.8 GNPA 0.8 0.9 1.0 1.0 NNPA 0.3 0.4 0.4 0.5 ROE 18.2 15.9 15.3 16.5 ROA 1.8 1.9 1.9 2.0 Balance sheet Crore (Year-end March) FY15 FY16 FY17E FY18E Sources of Funds Capital 529.5 595.0 595.0 595.0 Reserves and Surplus 10101.0 17461.0 19892.4 22897.7 Networth 10630.5 18056.0 20487.4 23492.7 Deposits 74134.4 93001.7 116425.0 145729.7 Borrowings 20618.1 23069.6 25416.7 28039.2 Other Liabilities & Provisions 3719.0 3584.8 3803.2 4039.7 Total 109,101.9 137,712.1 166,132.3 201,301.4 Application of Funds Fixed Assets 1157.6 1269.5 1444.2 1654.0 Investments 24859.4 31214.5 36010.5 41413.8 Advances 68788.2 88419.0 110083.7 138209.7 Other Assets 3531.6 5041.4 5117.5 4970.6 Cash with RBI & call money 10779.1 11767.8 13476.3 15053.2 Total 109,115.9 137,712.1 166,132.3 201,301.4 Growth ratios (% growth) (Year-end March) FY15 FY16 FY17E FY18E Total assets 25.4 26.2 20.6 21.2 Advances 24.8 28.5 24.5 25.5 Deposit 22.5 25.5 25.2 25.2 Total Income 19.2 23.0 21.0 19.8 Net interest income 18.3 32.1 25.7 21.3 Operating expenses 24.7 33.3 21.7 18.3 Operating profit 19.3 34.9 24.1 21.7 Net profit 27.4 27.4 28.8 23.6 Net worth 17.7 69.9 13.5 14.7 EPS 26.5 13.4 28.8 23.6. ICICI Securities Ltd Retail Equity Research Page 11
ICICIdirect.com coverage universe (Banking) CMP M Cap EPS ( ) P/E (x) P/ABV (x) RoA (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Bank of Baroda (BANBAR) 153 152 Hold 35,303-23 7 20-6.5 22.0 7.8 1.8 1.7 1.3-0.8 0.2 0.6-13 4 11 Punjab National Bank (PUNBAN) 137 112 Hold 26,892-20 15 22-6.8 9.3 6.2 7.5 2.5 1.3-0.6 0.4 0.6-10 7 10 State Bank of India (STABAN) 248 240 Hold 185,262 13 18 24 19.4 13.9 10.5 2.1 2.0 1.6 0.5 0.6 0.7 7 9 11 Indian Bank (INDIBA) 211 190 Hold 10,134 15 22 28 14.2 9.7 7.4 1.0 1.0 0.9 0.4 0.5 0.6 5 6 8 Axis Bank (AXIBAN) 520 510 Hold 123,534 35 35 42 15.1 15.0 12.5 2.4 2.3 1.9 1.7 1.5 1.5 17 14 15 City Union Bank (CITUNI) 138 140 Buy 8,315 7 8 10 18.7 16.4 13.8 3.0 2.6 2.2 1.5 1.5 1.6 16 16 16 DCB Bank (DCB) 121 98 Hold 3,143 7 7 9 17.8 17.2 13.6 2.1 1.9 1.7 1.1 1.0 1.0 12 11 13 Federal Bank (FEDBAN) 71 62 Hold 12,124 3 4 5 25.5 17.6 13.2 1.7 1.6 1.5 0.5 0.7 0.8 6 8 10 HDFC Bank (HDFBAN) 1,265 1,375 Buy 316,200 49 59 72 26.0 21.5 17.7 4.5 3.9 3.4 1.9 1.9 1.9 18 19 20 IndusInd Bank (INDBA) 1,220 1,350 Buy 72,608 38 49 61 31.8 24.7 20.0 4.1 3.6 3.2 1.9 1.9 2.0 16 15 17 Jammu & Kashmir Bk(JAMKAS) 75 68 Hold 3,612 9 13 19 8.7 5.8 3.9 0.9 0.9 0.8 0.5 0.7 1.0 7 9 13 Kotak Mahindra Bank (KOTMAH) 774 750 Hold 141,617 11 16 19 68.0 49.2 40.5 6.3 5.5 4.9 1.1 1.4 1.4 9 11 12 Yes Bank (YESBAN) 1,251 1,150 Hold 52,528 48 60 65 26.1 20.8 19.3 3.9 2.6 2.3 1.6 1.7 1.7 21 20 17 ICICI Securities Ltd Retail Equity Research Page 12
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 13
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ICICI Securities Ltd Retail Equity Research Page 14