IndusInd Bank – Sailing safely through storms
IndusInd bank (IIB) continues with its strong operating performance despite persistent macro headwinds, including demonetization. It has defied all the worries about the demonetization by reporting robust numbers in its latently released Q3FY17 results.
Performance review of Q3FY17:
Company has reported a healthy NII; 34.5% Y-o-Y and 8.1% Q-o-Q, driven by sturdy 25% Y-o-Y corporate loan and 25% Y-o-Y retail loan growth. NIMs stood at 4.0% for the second quarter in a row. This led by greater thrust on higher yielding consumer finance portfolio (both retail and MFI), decrease in funding costs; mobilization of low cost deposit base and reprising of bulk deposits and elevated share of fixed rate loan book. While the cost benefits are here to remain especially with increased CASA traction and higher market liquidity coupled with diversified loan mix, the NIMs at higher levels stand sustainable. The overall non-interest income performance still stood decent with the counter growing at 21.2% Y-o-Y mainly driven by traction in distribution fees (44% Y-o-Y growth) and investment banking (41% growth Y-o-Y) followed by general banking fees (38% Y-o-Y growth). Customer focus business model, cross sell expertise and increased new products should help maintain healthy fee income trends ahead.
Strong growth in the loan book:
Despite the headwinds of demonetization and sell down of loans worth Rs 8.5bn, IIB’s loan growth remains strong at 25% yoy and 4% QoQ. Growth is equally driven by the CFD and the corporate segments. Encouragingly, the high yielding CFD business grew 6% QoQ vs. 2.6% growth in the corporate segment. Healthy CRAR, diversified book and continued expansion in branch network augurs well for strong and sustained 25% CAGR loan over next couple of years.
Demonetization leads to surge in SA: SA growth of 56% yoy and 22% qoq led to 46%yoy 8% qoq growth in CASA. . The CASA growth was restricted with 7% QoQ drop in CA (Rs 80bn one off in 2Q). Bank has added 1.33 lakh (2.8 lakh during qtr) new customers during Dec- 16 vs. avg. run rate of 75-80k/month.
IIB has maintained high 4% levels of NIMs for the second quarter consecutively. It is well placed to further expand its margins given Healthy CASA, Further downward revision in interest rates, Fixed rate loans and Rising proportion of the high yielding CFD book. However, the improvement will partially be negated by capital consumption. We expect the company to maintain the current levels of NIM in the coming two years.
Impeccable Asset Quality:
Asset quality stood stable for the quarter with gross NPA ratio at 94 bps and net NPA at 39 bps; absolute gross and net NPAs increased by 8%+ Q-o-Q each in Q3FY17. The provision coverage stood comfortable at 59%.
While the diversified corporate exposure aids asset quality maintenance, the asset quality of consumer finance book also stands manageable with IIB strategically shifting focus to non-vehicle retail loans post the CV down-cycle thus maintaining the overall sturdy credit off-take. Given the guarded corporate loan book, stabilizing asset quality in vehicle finance portfolio and controlled restructured assets, we reckon the asset quality for IIB should remain stable; however, corporate loan exposure and exposures towards sensitive sectors such as gems and jewellery prompt us to maintain conservative stance incorporating higher gross NPAs at 1%+ and net NPAs at 0.3%+ over FY17-18E.
With strong balance sheet, sustainable earnings and promising return ratios Indusind Bank possess the right ingredients to maintain successful track record of growth and profitability and capital efficiency. While the robust loan book growth outlook remains intact aided by better growth in retail loans, the falling funding costs & better loan book mix with increased focus on non-vehicle finance have been the key catalysts to margins sustenance. Moreover, rich core profitability, low-cost CASA strength and ability to leverage upon the strong distribution network backed up by comfortable capital position (Tier I-16%) reinforces our belief in the sustainable superior earnings performance of the bank. We maintain healthy 25%+ earnings CAGR over FY17-18E.