Buy IndusInd Bank; target of Rs 1200: Religare

Religare's report on IndusInd Bank (IIB)

IIB’s Q1FY16 reported PAT grew 25% YoY to Rs 5.3bn – marginally ahead of our estimates. Loan growth was strong at 23% YoY and margins stable at 3.7%. The tier 1 ratio was up 33bps QoQ to 11.55% and should improve further as the bank has raised capital in Jul’15. RWA/total assets continued to decline (-400bps in last two quarters) with loan mix changes likely to drive further improvement. Asset quality was stable as the stressed assets proportion remained sub-1%.

IIB’s tier 1 improved by 33bps QoQ due to a reduction in market risk (lower MTM, higher G-sec portfolio), regulatory relief on retail loans, lower non-fund based exposure and an increase in overall ratings of the corporate book. The RWA/total assets ratio declined by 400bps in last two quarters, with management expecting further improvement in FY16 due to a change in the loan mix in favour of retail loans. Post capital raising (QIP + preferential allotment to promoters), the bank’s tier 1 will improve to 16%+, supporting loan growth ahead.

IIB’s loan book grew by 23% YoY (corporate +27%, retail +18%). CV/equipment financing books grew at 7%/13% sequentially, which is impressive and shows signs of a revival in the CV/CE segments. The bank’s reported margin of 3.7% remained stable QoQ.

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