IndusInd Bank’s Quality Curvature
An Edelweiss report indicates IndusInd Bank moving up the quality curve
By Neha Seth
IndusInd Bank (IIB), founded by Srichand P. Hinduja, is a private-sector bank in India which commenced its operations in 1994. In 2004, the bank merged with Ashok Leyland Finance, a commercial-vehicle-finance focused non-banking financial company (NBFC). Presently, bank provides its services to both consumer and corporate customers. It has a robust technology platform supporting multi-channel delivery capabilities. The banks’ current account composition follows as 50 percent in retail, 25 to 30 percent in IPO or escrow and 20 to 25 percent in corporate.
IIB has been successful in garnering support from strategic investors and raising capital at every stage to expand itself. The bank’s execution risk is expected to be minimal given its well-capitalized position – Tier 1 at 15.7 percent, improved profitability metrics such as Return on Assets (ROA), Return on Equity (ROE) and improving retail liabilities. Improving liability franchise and above average earnings growth at strong return ratios will ensure that IIB will sustain its premium valuations.
Core revenue momentum, efficiency gains aid operating profitability
IIB has delivered qualitatively strong performance for first quarter of financial 2018 with a mix of high and stable earnings growth, strengthened its balance sheet with adequate loan coverage, moderating the risk profiles to lower risk weighted assets. The bank’s market risk rose primarily cause of higher statutory liquidity ratio growth. Its core operating profit increased more than 33 percent on year to year basis.
IIB kept its net interest margins (NIMs) stable at 4 percent and gained efficiency by decreasing its cash-to-income ratio (C/I ratio) at 46 percent, which supported IIB’s core profitability. The current market price of IIB is Rs 1,561. On the valuation front, IndusInd Bank is trading at a one-year forward price-to-book multiple of 3.8 times, higher than some of its peers.
Loan Book Growth
The bank booked loan growth at 24 percent on year to year basis and 3 percent on quarter to quarter basis; however, the risk weight grew by 1 percent on quarter to quarter basis. The loan growth is largely driven by growth across segments such as corporate finance, non-vehicle retail though vehicle finance saw slower growth of 17 percent given GST transition and BS-IV implementation. It is expected that the growth in vehicle segment to normalize in the second quarter of 2018 as the disbursement in vehicle for the month of June has been higher than that of in April and May.
The vehicle finance disbursement remained flattish during the quarter at Rs 5.4 crore. The marginal cost of funds based lending rate (MCLR) is linked to total loan book comprising of its 40-45 percent.
In the second half of fiscal 2018, IIB expects loan tilt towards consumer finance to start playing out. With diversified growth levers, the bank is expected to swiftly capitalise on recovery momentum.
Strong CASA Growth
The current accounts and savings account (CASA) growth continues to be strong at more than 40 percent supported by greater than 65 percent growth in saving account balances. The growth is largely due to three key factors: focus on granular saving accounts- Rs 85,000 to 90,000 customers per month are added now; deepening in the balances and some breakthrough in government business whole new vertical set up to capture this business, while this is towards one corporate but is distributed towards 300 projects.
Post the implementation of GST, in a couple of markets, the commercial vehicle (CV) market is expected to grow and the second half of 2017 would expect good level of growth. The bank sold Rs 57 crore of assets during quarter- largely a commercial vehicle portfolio and some smaller accounts.
IIB has provision reversal benefit of Rs 120 crore (from one account where the provisions are contingent on UltraTech-Jaiprakash deal), however the bank chose to make floating provision of Rs 70 crore, Rs 33 crore is still retailed on this account and accelerated provisions of Rs 20 crore is made towards Security Receipts and MFI book, thus increasing the provision coverage ratio to 60 percent; provision reversal is based on some contingencies which will be reversed in second quarter of 2018.
Assessment of IIB’s Asset Quality
The gross non-performing loan (GNPLs) of IndusInd bank rose to 16 basis points to 1.09 percent in the April-June quarter. This is mainly due to slippages of two accounts from restructured book into non-performing loan (NPLs). Consequently, the overall stressed assets including GNPLs and restructured book was broadly stable. The slippages during the quarter were Rs 608 crore versus Rs 634 in the last quarter of 2017.
GNPLs in micro finance are for Rs 31 crore, based on internal process the bank generally makes 60 percent provisions. However, the private sector lender has made additional provisions of Rs 10 crore towards this, making total provisions equal to Rs 28 crore. Presently, the portfolio at risk stands at Rs 50 crore, though IIB is hopeful that the recovery will improve and by the end of the quarter PAR could be to the tune of Rs 25 crore, thereby no incremental credit cost is expected on this portfolio.
IIB had made exposure towards three accounts of the 12 cases referred to National Company Law Tribunal Insolvency for resolution of corporate insolvency with cumulative exposure of Rs 50 crore, wherein the bank is adequately provided for only residual Rs 10-12 crore may have to be provided for in the second quarter of 2018.
IIB’s focus shifts from risk weighted assets (RWA) with BBB rated and lower rated corporates to A and above rated corporates. This move towards better rate corporate sets an encouraging trend.
Sequentially, the capital adequacy of IndusInd Bank has improved on two counts, as the bank raised capital of Rs 1,000 crore through AT1 bonds or known as additional tier 1 bonds during the quarter and improved the risk profiles leading to lower risk weighted assets.
Exposure of IIB to telecom sector
Given the telecom sector is reporting stressed financial conditions, the Reserve Bank of India (RBI) recently asked the banks boards to review their exposure to the sector by June 30, 2017 and consider making provisions at higher rates so that necessary resilience is built in the balance sheets should the stress reflect on the quality of exposure to the sector at a future date.
As per the guidelines, IIB increased its standard asset provisions to 0.75 percent from earlier 0.40 percent and consequently had higher provisions of Rs 0.80 crore during the quarter.
The exposure is towards three large groups, reduced to 2.1 percent from 3.5 percent in previous quarter, following repayment by one of the large accounts. Also, given the lower ticket size of loans bank doesn’t expect any deviation in asset quality metrics.
The private sector lender has been in line with its Phase-4 target, reaping benefits of improved efficiency as the cost efforts translated and showed a healthy business momentum. IIB looks structurally poised to achieve its Phase-4 targets and repeat its success of earlier phases.
Planning cycle 4 target is to reduce cost/income ratio by 2 percentage points. This will largely be driven by lower operating expenses, including change in branch formats, steady headcount over last couple of quarters.
IIB’s earnings will be impacted if there is slower recovery post demonetisation or any further moderation in economic environment. Additionally, post demonetisation, if there is higher than expected withdrawal of deposits inflow will add to the bank’s share of risks. The risks come from the fact that if the bank is not able to achieve the desired level of integration among branches then cost may increase.
The rise in exposure in power sector is largely driven by increase in exposure to renewable segment -solar and wind, which has strong sponsors a and some increase in transmission segment. The management is cautious of the aggressive bids done and thus is cautious on this sector and is taking the exposure selectively.