IndusInd Bank: BUY. Proving its mettle

The year gone by has been challenging for the banking sector with credit growth touching decade low levels of 9.5 per cent. But private sector banks have proved their mettle, continuing to grow their loan book at a steady pace — faster than the industry.

Asset quality too has been stable. Investors looking to bet on the banking space, as a proxy to the possible recovery in the economy, should stick with good quality private bank stocks.

Having weathered the downturn well, these banks should also benefit more from a macro turnaround.

IndusInd Bank, a key player in the commercial vehicle financing space, reported healthy 25 per cent growth in profit in the recent March quarter, ending the year with a 27 per cent jump in earnings.

Belying the slack in the overall bank credit, IndusInd Bank’s strong earnings growth was backed by 25 per cent growth in loan book. While the growth in the bank’s retail loans — of which more than a third is to the commercial vehicle segment — has slowed down, steady growth in corporate loans has helped.

Despite challenges, the bank has also contained slippages on its loan book.

At the current price, the stock trades at 3.8 times its one-year forward book value, higher than its five-year historical average of 2.3 times. But stock prices of most private banks have shot up in the last year and are trading at their historical highs.

The premium valuations are likely to sustain given their strong fundamentals. For IndusInd too, robust fundamentals and a likely earnings upgrade from recovery in CV volumes should drive valuations. The bank is well capitalised (Tier I capital at 11.2 per cent) to drive the next leg of growth. Investors with a two-to-three-year horizon can consider buying the stock.

The bank’s retail loan growth slowed down from 30 per cent in 2013-14 to 15 per cent in 2014-15, owing to the sluggish growth in the auto sector.

The commercial vehicle segment, which now constitutes about 37 per cent of the retail loan book, was affected by the sharp decline in CV volumes over the last two years. The overall growth in loans during this period was led by the corporate segment which grew a robust 33 per cent in 2014-15.

However, the bank has been witnessing some uptick in the CV segment over the last two quarters. During the December quarter, there was a marginal 0.7 per cent growth (year-on-year) in loans to the CV space.

In the recent March quarter, the CV loan book grew by 10 per cent. Recovery in CV volumes should help the retail segment improve.

The faster growth in corporate loans, though, has led to a shift in loan mix in favour of the corporate segment; it now accounts for about 58 per cent of total loans, up from 55 per cent during the same period last year.

While this has led to lower yield on loans — yields on corporate loans are around 4-5 percentage points lower than that in the retail segment — the bank has been able to maintain its net interest margin, thanks to lower cost of funds.

Backed by its growing retail presence, the bank continues to have healthy traction in low cost current account and savings account (CASA) deposits; these grew 28 per cent in 2014-15.

IndusInd has added close to 200 branches during 2014-15. Further ramp up in branch strength will keep the growth momentum in CASA strong. After offering higher rates on savings deposits to attract customers, the bank has been reducing its rates recently. It has trimmed its savings deposit rate for deposits up to ₹1 lakh from May 2015 by 0.5 percentage points to 4 per cent. This should aid margins.

Despite the fast pace of growth in loans, IndusInd has been able to maintain stable asset quality by containing slippages. The total gross non-performing assets (GNPA) stood at 0.8 per cent of loans as of March 2015, down from 1.12 per cent in the previous year. This reduction was led by a large sale of asset to an asset reconstruction company during the March quarter.

The bank will book a loss of about ₹260 crore on this sale, to be amortised over two years. Restructured assets as a proportion of loans are at a comfortable 0.53 per cent. IndusInd Bank recently entered into an agreement with Royal Bank of Scotland to acquire its diamond and jewellery financing business.

The bank will add about ₹4,500 crore to its loan portfolio, taking the loans under this segment to over ₹6,000 crore.

The management has indicated that the business will be margin-accretive.

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