Jefferies India is bullish on private sector lender IndusInd Bank (IIB) and has raised its price target for the stock by as much as 50 percent from the current market price. The brokerage, in a recent note to investors, retained IndusInd Bank as its top buy and increased the price target to Rs 1550.
During an interaction with the management, the CEO emphasized that despite the extension of tenure being only two years as opposed to the anticipated 3 years, the bank is making significant progress towards achieving robust growth, enhancing its core business operations and boosting its return on assets, the brokerage said in the note.
The bank remains committed to expanding its expertise in specific domains to increase its liabilities among high-net-worth individuals, non-resident Indians and wealthy clients, as well as extending its loan portfolio to encompass new vehicle loans, micro-banking and small and medium-sized enterprise loans.
IndusInd Bank has witnessed an improvement in its funding profile, with the share of retail deposits (based on LCR) increasing from 31 percent in March 2020 to 40 percent at present. The share of CDs has decreased from 15-16 percent to below 5 percent, and the share of borrowings has reduced from 23 percent in March 2020 to 11 percent currently. Management believes that refinancing lines are of high quality as they offer long-term funds at reasonable costs without SLR/CRR requirements. However, IIB's term deposit premium to the top three private banks has decreased from its peak of around 180 basis points in August 2020 to 60 basis points now.
"Despite this progress, IIB still lags behind larger private banks, which poses a challenge in a high-interest-rate environment. To address this, IIB plans to focus on business owner clients, non-residents, its home market, and wealth products/relationships", Jefferies India said in its recent note.
Management anticipates a 20 percent compound annual growth rate (CAGR) in loans over the next 3-5 years. IIB currently holds a dominant position in segments such as commercial vehicles (CVs), microfinance institutions (MFI), and diamond trade finance, which account for one-third of the overall loan portfolio, the Jefferies report said. In the future, the bank plans to strengthen its position in segments such as housing, used-car, and merchant financing (in MFI markets), gold loans, and business banking. For the past few years, IIB has maintained a risk-averse approach to corporate lending, with a focus on cash flow-based lending, the Jefferies report added.
"We still see 20 percent CAGR over FY23-25 in loans and turnaround in earnings and ROE of 16 percent. CET 1 CAR is adequate at 16 percent. Valuations look attractive at 1.3x FY24E adj. PB and we maintain our BUY call with a price target of Rs1,550 based on 1.7x Dec-24 adj. PB", Jefferies India said.
The research note mentioned that the private lender's management expressed confidence in the improving asset quality trends, despite recognizing non-performing loans (NPLs) in micro-banking, two-wheeler loans, and corporate credit. The bank's gross NPLs currently stand at 2.1 percent of loans, with a specific coverage ratio of 71 percent and buffer provisions at 0.8 percent. To mitigate risk, the bank has withdrawn from lending to promoter and holding companies and has exercised caution when lending to micro-loans, the report said.
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