IndusInd Bank Q3 FY19: Expect elevated provision and muted stock performance near term

- Interest margin maintained at 3.83%. Loan repricing benefit kicking in especially on the corporate book although retail remains sticky (due to a higher share of fixed price loans).

- Strong growth in advances at 35% driven by corporate, vehicle finance as well as non-vehicle retail. Gaining market share, taking advantage of weak competitive landscape with 3.7% share in incremental advance in the past one year.

- No divergence reported in the audit of RBI for FY18

Source: Company

Key Negatives

- Deposit growth healthy but lags the blistering pace of credit growth and incremental credit to deposit ratio remains high. Low-cost deposit stable at 43.6% driven mostly by good growth in Current Account with Savings Account remaining soft.

- IIB provided Rs 255 crore in this quarter on account of its exposure to the IL&FS holding company. Taking into account the provision made in Q2 (Rs 275 crore) and the floating provision, the total provision stands at Rs 600 crore on an exposure of Rs 2000 crore. However, the asset continues to be standard in the books of the bank and might warrant more provision in the coming quarter as the bank takes the provision coverage to 40-50%.

- The exposure to the Special Purpose Vehicles (SPVs) of IL&FS of close to Rs 1000 crore is unlikely to turn delinquent. However, these accounts may slip into NPA (non-performing assets) as there is a moratorium on interest service following the NCLAT order. This additional provision for these SPV accounts will be within the guided credit cost level of 60 basis points (40 basis points incurred till December 18). Hence, elevated provision will continue for at least one more quarter.

- Gross slippage has almost doubled sequentially to Rs 806 crore in the quarter, mainly due to three mid-cap accounts of which two are from the EPC (engineering procurement and construction space).

 Other observations

- The optical fall in the provision coverage ratio (provision held against non-performing assets) was due to a write off to the tune of Rs 345 crore on accounts that were non-performing, but carried full provision.

- Launched wealth vertical called “Pioneer” with a target of Rs 16,000 crore assets under management and Rs 300 crore fees by FY21.

- The tenure of the current MD ends in March 2020 and there is a possibility that it might get extended by five years if regulator permits.

Outlook

Except for IL&FS exposure linked provision that is likely to continue for at least one more quarter, the result was in line. We expect the stock to remain weak to range-bound in the near term.

However, the bank is otherwise executing an impressive risk-adjusted growth strategy and is well capitalised to take advantage of the vacuum in the market with weak PSU banks and weaker NBFCs. It is likely to add a new category of customers and high yielding assets with the merger with micro finance lender Bharat Financial. IIB has corrected 22% from its 52-week high and trades at 3.1X FY20e standalone book. We recommend a careful watch on the stock and accumulate it in the impending weak phase.