IndusInd Bank Growing At A Scorching Pace

IndusInd Bank Limited is one of the fastest growing mid-sized private banks in India. IndusInd Bank delivered over 43 per cent returns over a one year period alone, thereby promoting investors' interest. 

Here, at DSIJ, we present an exclusive analysis of IndusInd Bank Limited. 

COMPANY OVERVIEW 

IndusInd Bank Limited (IBL) is a Mumbai-based new generation Indian bank that obtained a banking licence in 1994 to be a part of the process of reforms in the post-liberalisation era in India. The bank offers commercial, transactional and electronic banking products and services. 

IndusInd Bank boasts of more than 1,000 branches and over 1,800 ATMs spread across the country. Mumbai has the maximum number of branches followed by New Delhi and Chennai. The bank also has representative offices in London, Dubai and Abu Dhabi. 

The bank's operational segments include treasury, corporate/wholesale banking, retail banking and other banking operations. The treasury segment includes investment portfolios, profit or loss on sale of investments, profit or loss on foreign exchange transactions, equities, income from derivatives and money market operations. The Bank enjoys clearing bank status for both major stock exchanges - BSE and NSE - and major commodity exchanges in the country, including MCX, NCDEX, and NMCE. 

INDIAN BANKING SECTOR - AN OVERVIEW 

Due to strong economic growth, rising disposable incomes, increasing consumerism and easier access to credit, credit off-take has been surging over the past decade. As of March 2017, total credit extended reached US$ 1,223.81 billion. Demand has grown for both corporate and retail loans; particularly the services, real estate, consumer durables and agriculture allied sectors have led the growth in credit. 

During FY06—17, deposits grew at a CAGR of 12.03 per cent, reaching 1.54 trillion by FY17. Deposits under Pradhan Mantri Jan Dhan Yojana (PMJDY), have also increased. As on February 2017, Rs.665 billion were deposited, while 270 million accounts were opened. 

Access to banking system has also improved over the years due to persistent efforts of the government to promote banking-technology. The advancements in technology have brought the mobile and internet banking services to the fore. In order to enhance the customer's overall experience, the banking sector is laying greater emphasis on upgrading their technology infrastructure. Despite global upheavals, India's banking sector has remained stable, thereby retaining public confidence over the years. Enhanced spending on infrastructure, speedy implementation of projects and continuation of reforms are expected to provide further impetus to growth. 

Merger with Bharat Financial Inclusion :- IndusInd Bank has entered into an exclusive arrangement with Bharat Financial Inclusion (BFI) to strike out a merger deal by the end of the current financial year. BFI is India's second largest microfinance company, with a gross loan portfolio of Rs.9,630 crore in the first quarter of FY18. The merger is likely to help IBL expand its microfinance loan book about three times, a target that IBL was seeking to achieve in the next three to four years. After the merger, microfinance loans will increase to around Rs.10,000 crore and constitute around 9 per cent of IndusInd Bank's total loan book from 2.5 per cent currently. The merger would also help IndusInd Bank to expand by around 1,400 branches. 

FINANCIALS 

IndusInd Bank posted firm core business performance in Q1 FY18. The bank's net interest income grew 6 per cent QoQ and 31 per cent YoY to Rs.1774 crore. Its fee income decreased 4 per cent QoQ and increased 20 per cent YoY to Rs.1167 crore. IBL's revenue stood at Rs.2941 crore, increasing 26 per cent YoY and 2 per cent QoQ, while the operating profit grew 29 per cent YoY and 1 per cent QoQ to Rs.1589 crore. The bank's net profit soared 26 per cent YoY and 11 per cent QoQ to Rs.837 crore. IBL posted a cost-to-income ratio of 45.99 per cent as against 47.03 per cent in Q1FY17. Profitability growth has come on account of stable yields, increasing share of good quality loan book, increasing current accounts and savings accounts (CASA) and improvement in operational efficiency. 

 The bank's CASA has shown improvement, coming at 37.8 per cent for the quarter, up by about 90 bps QoQ and 340 bps on YoY basis. Its savings account (SA) deposits have grown 17 per cent QoQ and 65 per cent on YoY basis, whereas current account (CA) deposits have de-grown 3.4 per cent on QoQ basis and about 19 per cent on YoY basis. In order to build CASA traction, the company is expanding its branch network and focusing on target market segments like government business, key non-resident markets, self-employed, emerging corporate businesses, etc. 

Driven by credit growth of 24 per cent to Rs.1,16,407 crore and steady net interest margin (NIM) of 4 per cent, non-interest income grew at 20 per cent YoY and 6 per cent QoQ . The bank does not have any large exposure to 12 accounts referred to National Company Law Tribunal (NCLT). According to the management, the exposure is merely Rs.50 crore and the accounts are substantially provided for. The company's revenue-to-employee ratio increased from 38 in Q1FY17 to 47 in Q1FY18. 

DIVERSIFIED LOAN BOOK 

IBL's total credit book stood at Rs.11,6407 crore in Q1FY18. The traction in credit offtake has been strong at 27 per cent CAGR in the past six years which is way ahead of the industry's 18 per cent CAGR. The composition of the loan book is ideal. The consumer finance (CF) book accounts for 40.5 per cent, whereas corporate banking book (CB) accounts for 59.5 per cent. Going ahead, the bank plans to maintain 1:1 distribution of the total loan between CF and CB books. Going forward, the CF book is expected to be a major driver of overall loan book traction. 

 The CF book, amounting to Rs.47,095 as on Q1FY18, is largely vehicle finance focused, which contributed about 75 per cent of CF book. 

IBL's CB book at Rs.69,312 crore as on Q1FY18 is largely inclined towards working capital finance. The book is further diversified into three major categories: large corporate, mid-corporate and loans to small business constituting 28 per cent, 20 per cent and 12 per cent, respectively. Also, in terms of sectors, the CB portfolio is well diversified among more than 13 sectors, with gems and jewellery, leading with 5.66 per cent, followed by lease rental at 3.62 per cent and power generation at 2.56 per cent. 


ASSET QUALITY 

The bank has been increasing its lending quality. The gross non-performing asset (GNPA) and net non-performing asset (NNPA) ratios have declined from 3.1 per cent and 2.3 per cent, respectively, in FY08. Owing to IBL's peculiar loan mix, the GNPAs and NNPAs have reduced to 1 per cent and 0.3 per cent, respectively, by FY11. The ratios have remained at these levels currently. During Q1FY18, total slippages remain high at Rs.608 crore as compared to Rs.634 crore seen in Q4FY17. In Q1FY18, it was mainly led by higher slippages from the consumer segment at Rs.257 crore vis-à-vis Rs.177 crore in Q4FY17. Going forward, the bank is expected to contain asset quality deterioration.

DIVERSIFIED OTHER INCOME 

IBL's other income constitutes nearly 40 per cent of its operating income. In other income, the major component is the fee income that accounts for about 90 per cent. Various sources of fee income include distribution fees, general banking, trade and remittances, forex income, loan processing fees and investment banking. 

On the valuation front, the bank maintained a P/E ratio of 33.85x, as against its peers such as State Bank of India (105.52x), Axis Bank (36.31x) and HDFC Bank (22.8x). The company's P/B ratio stood at 4.88x, against its peers' State Bank of India (1.15x), Axis Bank (2.18x) and HDFC Bank (5.05x) The bank's ROE stood at 15.05 per cent in Q1FY17, which has increased to 16.17 per cent in Q1FY18. However, the company's ROA decreased from 1.94 per cent in Q1FY17 to 1.86 per cent in Q1FY18. 

RECOMMENDATION 

By maintaining its yield on assets and NIMs at 4 per cent and lending towards good quality assets, we believe the bank has a strategy in place to grow itself profitably. Also, the positive outlook for the banking sector and the merger with BFI augurs well for the bank. We expect IndusInd Bank to outperform the industry and be amongst the top private banks in the country. We recommend BUY on the stock for our reader-investors.