IndusInd Bank (IIB IN) - PhillipCapital (India)

INSTITUTIONAL EQUITY RESEARCH

IndusInd Bank (IIB IN) Divergence weakens asset quality slightly but not worrisome

INDIA | BANKING | Quarterly Update Top takeaways from Q4FY18 • Operating profit at Rs 17.7bn (+12.5% yoy) was slightly below expectations due to flat growth in non‐interest income at Rs 12.1bn. NII at Rs 20bn was marginally below estimates. However, PAT was broadly in line due to lower opex and credit costs. • NII, at Rs 20bn, was marginally below our expectations, as cost of funds increased qoq offsetting the increase in yield on assets, resulting in 2bps qoq decline in NIM to 3.97%. • Slippages increased to Rs 8.6bn, (Rs 4bn in Q3), due to increase in corporate slippages, to Rs 5.4bn (Rs 1.4bn in Q3). Slippages in consumer finance increased to Rs 3.2bn (Rs 2.1bn in Q3). GNPA/NNPA at 1.17%/0.51% increased 1bps/5bps qoq. PCR declined 400bps to 56% qoq. Key highlights: Advances grew 28% yoy driven by 30%/26% growth in corporate/consumer finance. Corporate and commercial loans were driven by large corporate (+41% yoy), while consumer loans were driven by CV (+27% yoy) and home and personal loans (+59% yoy). Fee income growth was moderate at 11% yoy due to 6% yoy decline in processing fee. Distribution fees grew 13% yoy and forex grew 16% yoy. Management comments / concall takeaways: • Yields in corporate loans improved, driven by increase in MCLR by 40bps, while in consumer, loan book yields softened due to increase in competition. • Vehicle‐finance disbursement was up by 47% yoy (12% qoq). Non‐vehicle consumer loan book was moderate due to conscious slowdown in LAP. • Corporate book grew strongly; have participated in refinancing of loans under NCLT. • The bank reported divergence of Rs 13.5bn, of which loans worth Rs 7.8bn were repaid (including one large cement account worth Rs 5.2bn repaid in Q1FY18); Rs 2.4bn were classified as NPA in prior quarters and Rs 1.2bn were sold to ARC. Rs 1.86bn of loans were included in GNPA in Q4. • Of the two diamond accounts, had a legacy exposure in one account, which is standard with most banks, but have been treated as fraud and has been provided. Outlook and valuation: IIB will continue to report strong performance led by robust growth in advances and stable NIM. Merger with Bharat financial will enable the entity to realize synergies in funding cost and opportunity to drive revenues from cross selling. Growth in consumer finance loans will gain momentum and will subsidize the high‐rated corporate business, thus allaying NIM and asset‐quality concerns. Risk adjusted RoA should continue to remain strong, driven by earnings CAGR of 23% in FY18‐20. We maintain BUY with increased target price to Rs 2050 (previous Rs 1900) valuing the stock at 3.8x FY20 BVPS of Rs 542. (Rs bn) Net interest income NIM (%) Advances Consumer advances Corporate advances Deposit CASA CASA % Core fee Trading gain Operating expenses Cost to income ratio (%) Provision PAT Slipapge GNPA NNPA Tier 1 Capital %

Q4FY18 Q4FY17 20.1 16.7 4.0 4.0 1449.5 1130.8 572.4 455.3 877.2 675.5 1516.4 1265.7 667.3 466.5 44.0 36.9 11.1 10.0 1.0 2.2 14.5 13.1 45.0 45.4 3.4 4.3 9.5 7.5 8.6 6.3 1.2 0.9 0.5 0.4 14.6 14.7

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH

19 April 2018

BUY (Maintain) CMP RS 1833/TARGET RS 2050 (+12%) COMPANY DATA 600 1121 17.1 1877 / 1375 31.9 10

O/S SHARES (MN) : MARKET CAP (RSBN) : MARKET CAP (USDBN) : 52 ‐ WK HI/LO (RS) : LIQUIDITY 3M (USDMN) : PAR VALUE (RS) :

SHARE HOLDING PATTERN, % PROMOTERS : FII / NRI : FI / MF : NON PRO : PUBLIC & OTHERS :

Key Financials Rs mn Pre‐prov ROE (%) Pre‐prov ROA (%) Net Profit % growth EPS (Rs) BVPS (%) ROE (%) P/E (x) P/BV (x)

Mar 18 16.8 52.2 11.0 4.3 15.7

Dec 17 16.8 50.2 12.9 14.6 5.6

Sep 17 16.8 48.3 14.1 15.1 5.8

FY18

FY19E

FY20E

29.9 3.5 36,060 25.7 60.1 397.2 16.2 30.5 4.6

31.5 3.5 44,344 23.0 73.9 461.1 17.2 24.8 4.0

32.9 3.5 54,601 23.1 91.0 542.4 18.1 20.1 3.4

CHANGE IN ESTIMATES __Revised Est. __ __% Revision__ Rs bn FY19E FY20E FY19E FY20E NII 92.9 114.9 ‐1.0 ‐1.3 PPP 81.1 99.0 ‐0.4 ‐0.5 44.3 54.6 0.5 0.1 Core PAT EPS (Rs) 73.9 91.0 0.2 ‐0.2 Manish Agarwalla, Pradeep Agrawal, Paresh Jain

yoy % Q3FY18 qoq % vs. expect. % Comments 20.4 18.9 6.0 ‐3.7 NII was slightly moderate due to marginal compression in NIM (3 bps) 4.0 (2 bps) (3 bps) NIM declined marginally due to increase in cost of funds 28.2 1285.4 12.8 2.5 Of the total loans, 40% comprise of consumer‐finance loans 25.7 531.2 7.7 Growth driven by CV loans, HL, credit card and personal loan 29.8 754.2 16.3 Driven by large corporates where PSB participation has been falling 19.8 1460.9 3.8 43.1 626.2 6.6 CASA growth aided by 30% yoy growth in savings AC 715 bps 43.0 100 bps Branch maturity, home branch strategy, and govt. business aiding SA 11.8 10.8 3.4 Core‐fee‐income growth was weak on a 6% decline in processing fee ‐55.8 1.1 ‐13.6 10.7 14.2 2.1 ‐7.7 Employee exp. increased 15%, other opex increased 9% (40 bps) 46.0 (100 bps) Decline in cost‐income ratio due to moderate growth in expenses ‐22.0 2.4 42.1 ‐11.7 Gross and net credit cost at 19bps each 26.8 9.4 1.8 0.7 PAT was in line with expectation due to lower provisions and opex 35.6 4.1 110.8 ‐100.0 Consumer finance at Rs 3.2bn, corporate at Rs 5.4bn 24 bps 1.2 1 bps (7 bps) Asset quality deteriorated marginally 12 bps 0.5 5 bps 7 bps PCR declined 400 bps qoq to 56% (14 bps) 15.3 (75 bps) CET at 14.07% (+26bps qoq); RWA growth 21% yoy

INDUSIND BANK QUARTERLY UPDATE

Result update (Rs mn) Interest Earned Interest Expended Net interest income Net interest margins Non‐interest income Total Income Total operating expenses Payroll costs Others Pre‐provision Profit Provisions & Contingencies % Operating income PBT Provision for Taxes % of PBT Net Profit Equity EPS, Rs Advances Deposits Advances / Deposits (%) Gross NPAs Gross NPAs (%) Net NPAs Net NPAs (%) CAR – Total

Q4FY18 46,501 26,425 20,076 3.97 12,085 32,161 14,467 4,535 9,932 17,694 3356 19.0 14,338 4,808 33.5 9531 6,002 15.9

Q4FY17 38,300 21,626 16,675 4.00 12,113 28,788 13,065 3,943 9,122 15,722 4301 27.4 11,421 3,905 34.2 7516 5,982 12.6

yoy growth 21.4 22.2 20.4 0.0 ‐0.2 11.7 10.7 15.0 8.9 12.5 ‐22.0 ‐8.4 25.5 23.1 ‐0.7 26.8 0.3 26.4

Q3FY18 42,868 23,920 18,948 3.99 11,868 30,816 14,169 4,600 9,569 16,647 2362 14.2 14,285 4,923 34.5 9363 6,000 15.6

1130805 1265722 89 10548.7 0.9 4,389.1 0.4 15.3

28.2 19.8 6.3 61.6 0.2 69.9 0.1 ‐1.8

1285420 1460860 88 14987.0 1.2 5,922.0 0.5 15.8

1449537 1516392 96 17049.1 1.2 7,456.7 0.5 15.0

Source: Company, PhillipCapital India Research


qoq growth 8.5 10.5 6.0 0.0 1.8 4.4 2.1 ‐1.4 3.8 6.3 42.1 4.8 0.4 ‐2.3 ‐0.9 1.8 0.0 1.8

12.8 3.8 7.6 13.8 0.0 25.9 0.1 ‐5.1


Financials Income Statement

Valuation Ratios

Y/E Mar, Rs mn Interest on Loans Interest on Investments Others Total Interest Earned Total Interest Expended Net Interest Income Total non‐interest income Total Income Personnel Expenses Other Expenses Total Op expenses Net Inc (Loss) before prov Provision and contingencies Net Inc (Loss) before tax Provision for Income Tax Net Profit

FY17 1,14,791 24,669 4,597 1,44,057 83,431 60,626 41,715 1,02,341 15,210 32,621 47,831 54,510 10,913 43,597 14,918 28,679

FY18 1,36,999 30,744 5,065 1,72,808 97,833 74,975 47,501 1,22,476 17,807 38,108 55,914 66,561 11,754 54,807 18,747 36,060

FY19e 1,71,386 35,970 5,976 2,13,332 1,20,438 92,894 56,906 1,49,800 21,724 46,959 68,683 81,117 13,726 67,392 23,048 44,344

FY20e 2,15,089 42,085 6,813 2,63,987 1,49,117 1,14,870 68,423 1,83,294 26,395 57,875 84,270 99,024 16,044 82,980 28,379 54,601

FY17

FY18

FY19e

FY20e

1,86,283

1,32,159

1,51,983

1,74,780

11,30,805 14,49,537 18,26,416

22,89,230

Balance Sheet Y/E Mar, Rs mn Assets Cash & Bal with RBI Loans, Adv & Int accrued Investments

3,76,196

5,00,767

5,81,072

Fixed Assets (Net)

13,352

13,388

15,396

17,705

Other assets

79,849

1,20,412

1,65,665

1,82,821

17,86,484 22,16,262 27,40,532

33,76,873

Total Assets

7,12,337

Liabilities Share capital Reserves and Surplus Debt Borrowing Total Deposits Other liab incld prov Total Liabilities

5,982

6,002

6,002

6,002

1,96,582

2,28,796

2,67,353

3,16,168

0

5,000

7,000

7,000

2,14,537

3,57,891

4,29,469

5,15,363

12,75,198 15,27,289 19,16,087

23,91,530

80,288

67,665

81,198

97,438

17,86,484 22,16,262 27,40,532

33,76,873

Source: Company, PhillipCapital India Research Estimates

Earnings and Valuation Ratios Pre‐provision Operating RoAE (%) RoAE (%) Pre‐provision Operating ROA (%) RoAB (%) EPS (Rs.) Dividend per share (Rs.) Book Value (Rs.) Adj BV (Rs.) Revenue Analysis Interest income on IBA (%) Interest cost on IBL (%) NIM on IBA / AWF (%) Core fee Inc / AWF (%) Portfolio gains / Total Inc (%) Op.Exp / TI (%) Op.Exp / AWF (%) Employee exps / Op exps (%) Tax / Pre‐tax earnings (%) Asset Quality GNPAs / Gr Adv (%) NNPAs / Net Adv (%) Growth Ratio Loans (%) Investments (%) Deposits (%) Networth (%) Net Int Income (%) Non‐fund based income (%) Non‐Int Exp (%) Profit Before Tax (%) Net profit (%) Asset / Liability Profile Avg CASA/ Deposits (%) Avg Adv / Avg Dep (%) Avg Invst / Avg Dep (%) Incr Adv / Deposits (%) Avg Cash / Avg Dep (%) Capital Adequacy Ratio: Tier I (%) CET I (%) NNPAs to Equity (%)


FY17

FY18

FY19e

FY20e

28.4 15.0 3.4 1.89 47.9 6.0 345.2 331.6 9.5 6.2 4.0 2.5 3.5 48.4 3.2 31.8 34.2 0.9 0.4 27.9 7.4 36.0 16.7 34.2 33.7 30.3 25.7 25.4 35.9 90.2 32.8 73.1 13.0 15.3 14.7 14.0 2.1

29.9 16.2 3.3 1.91 60.1 7.0 397.2 379.0

31.5 17.2 3.3 1.91 73.9 8.0 461.1 438.6

32.9 18.1 3.2 1.90 91.0 8.0 542.4 514.3

9.2 5.7 4.0 2.3 2.6 46.9 3.0 31.8 34.2

9.2 5.6 4.0 2.3 2.0 46.8 3.0 31.6 34.2

9.2 5.6 4.0 2.3 1.6 46.7 2.9 31.3 34.2

1.2 0.5

1.3 0.6

1.3 0.6

28.2 33.1 19.8 15.5 23.7 16.1 16.9 25.7 25.7

26.0 16.0 25.5 16.1 23.9 21.6 22.8 23.0 23.0

25.3 22.6 24.8 17.6 23.7 21.6 22.7 23.1 23.1

40.5 91.1 31.3 126.4 11.4

44.3 94.0 31.4 96.9 8.3

45.4 94.3 30.0 97.3 7.6

15.0 14.6 13.4 3.1

14.7 14.2 12.8 3.6

14.2 13.7 12.2 4.1


Stock Price, Price Target and Rating History 2100 1900

B (TP 1900) B (TP 1900)

1700

B (TP 1800) B (TP 1660)

1500 B (TP 1390) B (TP 1390) B (TP 1344)

1300 1100

B (TP 1150)

B (TP 1150)B (TP 1150)

900 700 500 300 A‐15 J‐15 J‐15 A‐15 B (TP 1150) N‐15 J‐16 F‐16 A‐16 M‐16 J‐16 A‐16 O‐16 N‐16 D‐16 F‐17 M‐17M‐17 J‐17 A‐17 S‐17 N‐17 D‐17 J‐18 M‐18

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY

>= +15%

NEUTRAL

‐15% > to