Buy IndusInd Bank; target of Rs 2075: JM Financial

JM Financial's research report on IndusInd Bank

IndusInd Bank reported an operationally strong quarter in 2QFY19, with operating profit up 22% YoY (in-line with JMFe). However, IIB’s PAT missed our estimates by 15%, largely driven by elevated provisions on account of exposures to the IL &FS group (currently classified as standard). IIB made contingency provisions of INR 2.75 bn against the account (14% of PPoP), resulting in flattish PAT in 2QFY19 (+4.6% YoY). The exposure to the group, although not quantified by management, is on 2 counts a) At the SPV level to a completed and currently tolling tunnel project (AAA rated recently) and b) At the holdco level, where IIB has first right to any liquidity support to holdco/ rights issue etc. The IL & FS exposure, which could be between 0.6-1% of loans (in our view) , remains a key monitorable for IIB going forward. Operationally, loan growth was strong (+32% YoY) while margins contracted 8bps QoQ to 3.84% in 2QFY19.

Outlook

The NIM softness could be temporary in our view, as MCLR-based loans get re-priced for IIB. We cut our PAT estimates (for IIB + BFIL merged entity) by 2% for FY19E and reduce our TP by 2% to INR 2,075. Maintain BUY.