IndusInd Bank: Buy

Better-than-industry earnings growth expectation and superior profitability ratios justify a high valuation for the bank.

Sustained improvement in operating parameters positioned IndusInd Bank among the top performing banks in terms of earnings growth over the last three years (from the time the new management took over).

The first phase of restructuring, which involved improving profitability, productivity and efficiency of the bank, came to an end in March 2011 with all parameters surpassing the bank's internal targets.

The bank's loan book grew at a healthy 26 per cent compounded annually during the period FY08-FY11. Net profit grew at 97 per cent annually during the same period. Given this backdrop, we reiterate a buy on the stock of IndusInd Bank. The investment case in IndusInd Bank is bolstered by a few factors.

Among these are its strong positioning in the niche commercial vehicles (CV) financing business, low non-performing asset ratio, healthy profitability ratios, strong fee-income flows, aggressive expansion of branch network to attract retail customers and foray into new lending segments. The return on asset of the bank for the year ended March 2011 was a healthy 1.26 per cent. The NIM was also strong at 3.98 per cent. Even in the recent tough March quarter, the bank maintained NIM at 4.03 per cent, demonstrating its ability to sustain high margins.

At the current price of Rs 260, the stock trades at 2.5 times its estimated FY13 adjusted book, which is at a premium to other new private sector banks, barring HDFC Bank. However, given the better-than-industry earnings growth expectation and superior profitability ratios, a high valuation for the bank seems justified. The price-estimated FY13 earnings multiple for the bank works out to 13 times.


IndusInd Bank's loan mix is well divided between retail and corporate, with high yielding retail banking constituting 44 per cent of the loans. Given the expertise and synergies gained from the merger of Ashok Leyland Finance with itself, the majority of the retail loan book of IndusInd Bank flows from the auto sector.

However, the bank is increasingly shifting its focus towards other retail avenues such as mortgage loans (currently only one per cent of the book), credit cards and loan against property and shares.

The bank also hopes to up its used-vehicle portfolio exposure to Rs 2500 crore from Rs 1000 crore. It is also into supply chain and vendor financing. IndusInd Bank also recently bought Deutsche Bank's loss-making credit card business — a portfolio of around Rs 225 crore and 2 lakh customers and hopes to turn it around in a year. These diversification moves can help increase the disbursement avenues for the bank, and help it maintain better credit growth than the industry.

Branch Expansion

Aggressive expansion of the branch network will help IndusInd Bank acquire more retail business on both the asset and liability sides. Over the next three years, it wants to more than double the current network of 300. This can increasefee-income possibilities and aid acquisition of low-cost deposit customers. Apart from its strength in forex, trade and investment banking, third-party distribution is expected to play an important role in the bank's fee income; fee income now accounts for around 31 per cent of the net revenues.

The CASA ratio, as of March 2011, stood at 27 per cent, an improvement from 23.7 per cent in FY10 and 19 per cent in FY09. Of these, majority are current account deposits, with savings bank deposits accounting for only 8.9 per cent of the total deposit.

As there is a possibility of savings rate de-regulation, IndusInd Bank is well-positioned to attract retail customers by pricing deposits attractively, given that it has relatively high borrowing cost compared with its peers.The bank has an internal target to achieve 35 per cent CASA proportion by end-FY14.


Cost-income ratio, a measure of efficiency, was maintained at 48.25 per cent despite sharp rise in operating expenses on the back of growing branch network. The longer-term target of the bank is to bring it down to 45 per cent.

While the credit-deposit ratio of 76 per cent as of March 2011 is slightly on the high side, given the high core equity in the books, the bank can maintain this ratio over the longer-term. High credit-deposit ratio, along with regular pass-through of wholesale borrowing costs to the lending side, will help the bank maintain NIMs.

IndusInd Bank has over the last four years raised capital every year to fund its credit growth. Last fiscal, it had raised Rs 1,160 crore, which increased the capital adequacy ratio to 15.8 per cent. With current capital and internal accruals, the bank can maintain a capital adequacy of 12 per cent over the next two years. For a bank that has high exposure to retail loans, the gross NPAs stood at a reasonable 1.01 per cent with a provision cover of 73 per cent. The restructured asset proportion is also low at 0.28 per cent.


Currently the bank is highly dependent on vehicle sales, especially commercial vehicle (CV) segment, which may subject it to risks arising from the expected churn in the business cycle in the auto segment.

However, the bank's diversification into the used segments of cars and CVs should provide a hedge. So also, the foray into other retail segments.

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