IndusInd Bank’s Q3FY19 NII has improved by ~21% yoy to Rs2,288cr against Rs1,821cr. The net profit was above consensus estimates and has improved by 5.2% yoy to Rs985cr against Rs936.3cr yoy. The lower provisioning of Rs255cr made on certain assets related to IL&FS and higher other income led to a beat on profits. GNPA for Q3FY19 stood at 1.13% against 1.09% qoq, indicating an increase of 4bps. NNPA for the quarter came in at 0.59% as against 0.48% qoq, a rise of 11bps.
IIB’s financial performance was underscored by strong loan growth, well-controlled operating costs, healthy operating profit growth and low capital consumption in 3QFY19.
A few emerging challenges are: 1) pressure on NIMs, 2) slippages in the more granular small-corporate and vehicle-finance segments and 3) higher credit costs needed for taking PCR from 48% towards 60%.
NII growth was stable, but trailed loan growth due to yoy compression in margins owing to a sharper uptick in cost of funds versus yield on advances (due to high borrowings).
The cost of funds increased (78bps yoy, 17bps qoq) resulted in muted NII growth
Strong interest income growth of 34% yoy was witnessed due to the effect of MCLR hikes.
Operating expenses were controlled despite addition of branches and staff in the quarter. Strong control on costs drove PPoP growth to 27% yoy.
The banks’s loan book for the quarter grew 35% yoy (to Rs1.73 lakh cr) taking LDR to 99%. Its Corporate book and Vehicle Finance book grew by 34% and 30% yoy, respectively.
IIB reported 35% yoy growth in credit, led by sharp growth in small corporate, vehicle finance and MFI.
Deposits for the quarter were up 20% yoy to Rs1.75 lakh cr. Deposit growth substantially lagged credit growth, forcing IIB towards market borrowings (up 91% yoy)
Non-interest income for the quarter stood at Rs1,469cr as against Rs1,187cr yoy, indicating a growth of 24%.
Core fee income rose 18% yoy to Rs1,266cr.
Non-Vehicle Retail book grew 28% yoy.
Cost to Income ratio and CASA for the quarter came in at 43.65% and 44%, respectively.
Asset quality weakened, slippages increased and PCR declined to 48% (56% in 2QFY19).
Provisioning for the quarter stood at Rs606cr as against Rs590cr qoq.
Provisions were much lower than expected, resulting in a sequential drop in PCR to 47.7% in 3QFY19 (55.8% in 2QFY19).
Provisions on the IL&FS Holdco exposure of Rs2,000cr stand at 30%. Management indicated that this could increase to 40-50%.
Credit cost was 18bps for the quarter and 40bps for 9 months.
IIB did not have any asset classification divergence, as per RBI’s risk based supervision for FY18.
Fresh slippages for the quarter came in at Rs806cr as against Rs419cr qoq.
The bank continues to classify IL&FS' assets under standard account.
Its Capital Adequacy Ratio (CRAR) stood at 14.19% for Q3FY19.
Key takeaways from the earnings call
Exposure to real estate loans decreased sequentially (4.06% to 3.84%), as did exposure to NBFCs (4.77% to 4.63%).
Reduction in exposure to steel (3.56% to 2.38%) was due to repayment of a loan given to finance an NCLT acquisition.
Gems and jewellery exposure decreased (4.80% to 4.11%) driven by rupee appreciation (since a major portion of the book is US$ denominated).
Power sector exposure increased (3.39% to 3.86%) on account of draw-downs by public sector enterprises.
IIB did not purchase assets from NBFCs in 3QFY19.
SA deposits declined 2% QoQ due to the loss of certain government deposits, while CA deposits spiked 19% sequentially. Management expects both these impacts to be transitory in nature.
Borrowings for IIB increased 91% YoY as the bank sought alternative sources of funding to offset the increase in cost of deposits. Management is utilising foreign exchange borrowings on account of being better priced and less volatile in nature.
Management indicated that margins should expand going forward due to the effect of the MCLR increases and moderation in competitive intensity of NBFCs.
strength for the bank stood at ~26,800. • IIB added 92 branches in 3QFY19. The bank will target increasing its rural reach by converting business correspondent (BC) centres into banking outlets.
IIB added ~10 lakh customers in 3QFY19; customer base stood at ~1.4cr.
BHAFIN merger: The transaction has received shareholder approval from both sets of shareholders. It is now before the NCLT tribunal, post which it would require certain operational procedures. Management expects this to be completed by 4QFY19.
IIB has an exposure of Rs3,030cr to the IL&FS Group, of which Rs2,000cr is to the Holdco and Rs1,030cr is to operating entities.
Management does not expect any haircut on exposure to the operating entities; however, provisions would have to be made when the accounts turn NPL (to be written-back subsequently).
Currently, the entire exposure is classified as standard in the books of the bank and IIB is accruing interest on the same.
Management re-iterated credit cost guidance of 60bps for FY19ii. This would take into account any provisioning that would be required when the operating entities of IL&FS turn non-performing. However, provisioning on the Holdco would be over and above the 60bps.
Slippage in the corporate portfolio stood at Rs4.6bn in 3QFY19, up from Rs0.9bn in 2QFY19. This was largely attributed to 2-3 mid-size accounts, of which 2 belonged to the EPC construction space.
PCR declined 8 percentage points to 47.7% in 3QFY19, primarily due to the write-off of Rs345cr of loans.Management indicated that it would increase PCR to 60% over time.
IndusInd Bank Ltd is currently trading at Rs. 1,595.90, up by 18.3 points or 1.16% from its previous closing of Rs. 1,577.60 on the BSE.
The scrip opened at Rs. 1,570.10 and has touched a high and low of Rs. 1,606.80 and Rs. 1,549.30 respectively. So far 58,57,937 (NSE+BSE) shares were traded on the counter. The stock is currently trading below its 200 DMA.
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