IndusInd Bank: Noteworthy performance - Buy

Despite challenges in the sector, the bank has put up a good show

The stellar rally in the stock market over the past year or so appears to be losing ground. Much of the euphoria has been led by mid- and small-cap stocks, where valuations have sky-rocketed, without any significant turnaround in fundamentals. There are, however, other stocks that have commanded a higher premium in valuations, thanks to sound financials and steady earnings growth, in an otherwise lacklustre environment. In the ongoing market correction, such stocks offer good buying opportunity for investors with a long-term horizon.

IndusInd Bank, that has been consistently delivering 25-30 earnings growth in the last several quarters, despite challenges within the sector, is a good bet for investors over the long run. The stock’s valuation has gone up significantly since our last buy call last January, along with the broader market rally.

From a three-year historical average of three times the one-year forward book value, the stock has been trading at 3.8 times on an average in the past one year. But an above-industry loan growth, robust traction in low-cost deposits, stable margins and steady asset quality, lend comfort to the notable rise in valuations.

 

The stock as such had gained a little over 33 per cent in the last one year up until the Budget — only slightly outperforming the market indices.

Hence, the run up in the stock, given its strong underlying fundamentals, is not a concern. But given that the market has only now begun correcting and can see some more pain in the near term, investors would do well to accumulate the stock in dips over the next couple of months.

Bad loans under check

IndusInd Bank has been able to ward off sudden shocks and nasty surprises on the asset quality front which, given the widespread concern in the banking system, is noteworthy. Since December 2015 (RBI’s asset quality review), the gross non-performing assets have remained within a narrow range of 0.8 per cent to 1.1 per cent of loans.

Underlying strong growth in credit has helped mitigate the increase in bad loans in absolute terms. In the latest December quarter, while GNPAs have slightly inched up to 1.16 per cent from 1.08 per cent of loans in the September quarter, it has been broad based and not specific to one account. The RBI’s divergence report on the Annual Risk Based Supervision for FY17 however is still awaited. Nonetheless, the bank’s well-diversified loan portfolio, a small restructured book (0.15 per cent of loans) and lower exposure to stressed sectors, lend comfort on the asset quality front.

Strong growth

 

A well-diversified portfolio has also helped the bank deliver above-industry loan growth. In FY17, for instance, even as growth in commercial vehicle financing slowed, other segments within retail such as car loans, credit card and loan against property kept loan growth in good stead. Within corporate loans too, a broad portfolio has helped.

One of the largest CV financer in the country, IndusInd’s consistent uptick in commercial vehicle loans, augurs well for its earnings in the coming quarters. In the December quarter, CV loans have reported a 23 per cent Y-o-Y growth.

Overall, IndusInd’s loan book grew by a robust 25 per cent Y-o-Y in the December quarter, driven by 26 per cent growth in corporate loans and 24 per cent in retail.

Stable margins

Despite the sharp fall in lending rates over the past year, the bank has been able to maintain margins at 4 per cent levels.

The bank’s marginal cost of funds based lending rate (MCLR) has fallen by 60 bps between December 2016 and December 2017.

But the bank’s relatively higher proportion of fixed rate loans (70 per cent) and a healthy traction in low-cost CASA deposits has aided margins.

Going ahead, with interest rates in the economy expected to rise, pressure on yields should ease.

As such, IndusInd has already increased its one-year MCLR by 10 bps in the past month. This should provide some cushion.

Aside from a healthy growth in core net interest income, the bank’s strong growth in fee income is a key positive.

The bank boasts of a robust return on assets of 1.9 per cent and is well capitalised to fund its robust loan growth.

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