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Backed By Strong Asset Quality, Buy This Banking Stock For Good Upside

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IndusInd Bank is a private sector bank established 28 years back in 1994. The bank has a pan-India presence with 2,265 branches/banking outlets and 2,767 ATMs spread across 769 geographical locations in India. Also, the bank has representative offices in international cities such as London, Dubai, and Abu Dhabi. The bank has a strong retail loan franchise, along with its subsidiary in microfinance. The extended network of the bank includes branches of BFIL and outlets of IMFS. The bank is well placed with adequate capital levels.

 

Why Should You buy - Operating performance to improve going ahead

Why Should You buy - Operating performance to improve going ahead

In the report, the Sharekhan brokerage firm says, "We expect that with IIB addressing the challenges on its microfinance book, the overhang has been done away. Additionally, factors such as the bank's willingness to recognize stress upfront in any loan segment before it becomes challenging to manage and its strategy to create adequate provisions or counter cyclical buffers if the business is risky will be cushions for the long term. Our constructive view on InduanInd bank is backed by its strong asset quality performance (demonstrated for a large part in recent years, except in the near past) and improved capital levels. Near-term challenges continue, but we expect loan growth and credit costs to normalize in FY2023E, given improving macroeconomic conditions and the bank's stated stance to front-load provisions. "

Result
 

Result

According to the brokerage firm, "Net interest income grew by 13% y-o-y/ 5% q-o-q reported at Rs.3,985 crore, aided by advances growth and margin improvement. With reduction in cost of deposits by 6 bps q-o-q and a higher retail mix, NIMs improved to 4.20% by 10 bps q-o-q. Core fee income grew by 9% y-o-y / 8% q-o-q. Other income was lower by 5.5% y-o-y. Bank expects to maintain NIMs in the range of 4.10 - 4.25%."

The brokerage stated that the total operating expenses grew by 14% y-o-y on account of increased business volumes and accelerated investments in technology. The focus is to build higher digital value proposition stacks along with a more digital product suite for the bank. The cost-to-income ratio remained stable at 43.5%.

The brokerage expects a higher advance going ahead. The brokerage in the report says, "Advances grew by 12% y-o-y and 5% q-o-q. The share of retail loans was ~ 54%, with vehicle loans comprising 26%, Non-vehicle finance book (mainly business banking, PL, CC, LAP) comprising 15% and microfinance loans at 13%. Vehicle book grew by 1% y-o-y. The secured non-vehicle book remained flat on y-o-y. Unsecured personal loans and credit card advances grew 21% y-o-y and 22% y-o-y respectively. MFI book grew by 18% y-o-y. SME and wholesale corporate book grew by 20% y-o-y. Robust growth in retail and SME portfolio can be fully attributed to digital initiatives. The bank stated that 15-18% advance growth is sustainable going forward. Disbursements in vehicle portfolio picked up after subdued performance in 9MFY22 growing 13% q-o-q & 19% y-o-y led by CV, tractor, CE, Cars. Two-wheeler loans were still subdued. The bank was cautious on the MFI business in Q3FY22 due to third-wave concerns; but in Q4FY22 MFI business has bounced back strongly as collection efficiency in MFI book excluding restructured book was above ~99%; Bank expects credit cost would normalize in MFI business going ahead. Guidance for credit cost in MFI business at 2.5% and 27% - 28% growth in MFI book."

The brokerage maintains a 'buy' rating for a target price of INR 1,150

The brokerage maintains a 'buy' rating for a target price of INR 1,150

According to the brokerage firm, "The stock currently trades at 1.4x/1.2x of its FY23E /FY24E ABV. A well-capitalized balance sheet, improvement in collection efficiencies in MFI business, reduction in fresh slippages/ restructured book and high PCR levels, credit cost seems to be manageable and business normalcy is expected to resume in FY2023E. Given the improvement in demand in its vehicle portfolio, MFI business and corporate book, the bank is on upward trajectory path in terms of ROA & ROE profile going forward. Bank guided for credit growth of 15-18% going forward along with building granular retail liability franchise. We believe valuations are reasonable. Hence we maintain a Buy rating on the stock with an unchanged PT of Rs. 1,150."

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.

Story first published: Monday, May 2, 2022, 12:19 [IST]
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