Q3FY24 Review: IndusInd Bank: Lower provisions drive in-line PAT

19 Jan 2024 , 11:58 AM

IIB’s Q3 PPOP was 4% below consensus, but lower provisions (draw down of contingency buffer) led to in-line PAT. NII grew 4% QoQ; in line with loan growth as the NIM was flat QoQ. Stressed loan ratio improved 20 bps QoQ; however, slippages inched up modestly (both consumer and corporate). Analysts of IIFL Capital Services expect stable NIMs in the near term, but trend better vs peer banks when the rate cycle turns (benefit from fixed rate loan book and wholesale liabilities). Analysts of IIFL Capital Services cut their est. by 1-3%, and raise TP to Rs1,870, rolling forward to FY26. Maintain BUY rating as riskreward is attractive at 1.8x FY25 P/B for 16% ROEs. 

Strong loan gr. across the board; NIMs flat QoQ. 

Loan growth of 4% QoQ/20% YoY was broad based. Higher consumer loan growth led to 6 bps QoQ asset yield expansion, but was offset by a similar rise in the COF; resulting in flat margins. We expect stable NIMs in the nearterm, but trend better vs peer banks when the rate cycle turns (benefit from fixed rate loan book and wholesale liabilities). Slippages inch up; cost to remain elevated. Gross slippages inched up to 2.2% (vs 1.9% in Q2), due to higher flows from VF, ‘other retail’ segments and one corporate account (Rs1.4bn). However, higher write off resulted in flat NPA ratio (1.9%). 

Stressed loan ratio improved 20 bps QoQ to 2.9%. 

The bank utilised Rs2.2bn of contingency buffer leading to lower credit cost of 120bps. CIR was up by 56bps QoQ, on the back of higher marketing spends, branch and employee additions. We expect costs to remain elevated in the medium term (45% by FY26E), and believe that management guidance of 41-43% CIR is stretched. 

Risk-reward remains attractive. 

Analysts of IIFL Capital Services expect bank to see a modest RoA improvement over FY25-26E, led by robust loan growth, stable NIMs and benign credit costs – led by late cycle recovery in the key segments. In context of expected ROA improvement, IIB is trading at 1.8x FY25E P/B — at ~20% discount vs LTA of 2.3x. And thus, offers attractive risk-reward in the. Retain BUY with a TP of Rs1,870, ascribing a target multiple of 1.8x on FY26E BV.