Buy IndusInd Bank; target of Rs 2020: Edelweiss

Edelweiss' research report on IndusInd Bank

IndusInd Bank’s (IIB) Q3FY18 PAT of INR9.4bn (up 25% YoY) was broadly in line with estimates. However, revenue momentum came in marginally below estimate (NII up 20% YoY), with earnings supported by lower credit cost. Key positives: a) CASA - Savings growth accelerated (up 68% YoY), leading to ~43% CASA ratio (surpassing 40% target set for FY20); b) retail credit, particularly vehicle financing, is showing strong momentum; c) in line with Phase-4 target, benefits of operating efficiency have started to play out; d) GNPLs were contained at 1.16% with slippage of 1.3% (1.7% in Q2FY18). Key monitorables: a) some moderation in revenue traction (given likely pressure on yields); b) RBI’s divergence report (still pending); and c) merger with BhaFin (likely conclusion in Q2FY19). We believe IIB is structurally poised to achieve Phase-4 targets and see encore of success of earlier phases. Given strong track record, superior RoA and well-capitalised position, execution risks are minimal. We roll forward to FY20 estimates and maintain ‘BUY’ with a revised TP of INR2,020 (INR1,920 earlier), on 3.8x FY20E P/ABV.

Outlook

IIB has delivered yet another steady quarter. Even more commendable is that: 1) IIB is now delivering a mix of sustainable earnings growth with granularity; 2) balance sheet has strengthened; and 3) outlook is favourable. We expect superior growth, stable margins and controlled credit costs to help IIB sustain 24% earnings CAGR over FY18-20E. At CMP, the stock trades at 3.2x FY20E P/ABV. We maintain ‘BUY/SP’.