Healthy core: IndusInd Bank

Strong loan growth and steady asset quality have made the bank a resilient performer

With public sector banks facing capital crunch and many non-banking finance companies weighed down by liquidity issues, leading private sector banks are set to gain. Access to low-cost deposits and ample capital to grow loan book should result in market share gains for sound private lenders, as NBFCs continue to grapple with rising interest rates and tight liquidity conditions.

IndusInd Bank has been a resilient performer, delivering strong loan growth over the last two to three years, even as other private peers witnessed slowdown in credit growth and rise in delinquencies. Over several quarters, the bank has registered 25-30 per cent growth in earnings, on the back of robust loan growth, more or less stable margins, and steady asset quality.

The stock has fallen by about 10 per cent since our last Buy call in the beginning of the year, along with the overall weakness in the market. This fall presents a good opportunity for long-term investors to accumulate the stock at current levels. At the current price of ₹1,497, the stock trades at 3.1 times its one-year forward book value, lower than its three-year historical average of 3.4 times (valuations had moved up sharply in the beginning of the year to 4.2 times). Given the strong loan growth and steady earnings expectation, investors can buy the stock with a two- to three-year time horizon.

Strong core performance

Notwithstanding the slowdown in credit growth within the banking sector over the last two to three years, IndusInd Bank has been able grow its loan book at a healthy 25-30 per cent over the past several quarters. The bank’s well-diversified portfolio has kept the loan growth in good stead. For instance, even as the bank delivered a modest 11 per cent growth in commercial vehicle loans in FY17, other segments within retail kept up the momentum in overall credit growth.

The steady uptick in commercial vehicle financing through FY18 (27 per cent growth) and in the first quarter of the current fiscal, has continued in the September quarter too, with the bank posting a 34 per cent Y-o-Y growth in this segment.

Tractor, equipment financing, and credit cards are other segments within retail that have grown at a robust pace in the latest September quarter. Corporate loans too have seen a strong growth of 35 per cent Y-o-Y, aiding overall loan growth.

Hence, the 32 per cent Y-o-Y growth in overall credit in the September quarter has been driven by a healthy traction in both corporate and retail loans.

The bank’s net interest margin, however, has been trending lower over the past few quarters. In the September quarter, NIM stood at 3.84 per cent, down from 3.92 per cent in the June quarter and 4 per cent in the same quarter last year. IndusInd’s relatively higher proportion of fixed rate loans (70 per cent) is one reason for the dip in margins, as deposit rates continue to rise. Also, pricing of deposits and liabilities have been faster than the re-pricing of the asset book; this has impacted margins. That said, the bank’s healthy share of low-cost CASA deposits and strong loan growth should keep margins within a narrow band.

The bank has also increased its benchmark lending rate — MCLR — by 40-45 bps over the past six months. As new loans are priced at higher rates and existing loan book gets reset, yields should move up in the coming quarters, aiding margins.

Needs a watch

While the bank has been able to maintain a gross non-performing assets (GNPA) ratio of around the 1 per cent over the past four to five years, certain aspects need monitoring.

The bank had made a contingent provisioning of ₹275 crore in the September quarter, pertaining to its exposure to IL&FS group. This may need some watching in the coming quarters, as additional provisioning/haircut on this exposure could impact earnings. Also, over the past year, steep bad loan divergences reported by banks has been a cause for worry. The divergence report for FY18 for IndusInd will be a key factor to look out for in the coming quarters. That said, what lends comfort is that the bank has been able to maintain good asset quality over the past several years. One-off spikes in provisioning aside, earnings growth should remain fairly healthy. Post the IL&FS crisis, the bank has also reviewed its NBFC portfolio and the management has stated that it is satisfied with the quality of its book.

The bank is also well-capitalised with Tier-1 capital ratio at 13.8 per cent as of September 2018. This should help it maintain a strong 22-25 per cent loan growth over the next one to two years, keeping earnings in good stead. IndusInd Bank had earlier entered into an agreement to acquire 100 per cent stake in IL&FS Securities Services. In a recent exchange filing, the bank has informed that the agreement stands terminated.

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