Hold Indusind Bank; target of Rs 550: Emkay Global Financial

Emkay Global Financial's report on Indusind Bank

Due to corporate asset quality issues for the past two years and the recent deposit scare after the Yes Bank saga, new top management’s long-term stance is to focus on building a granular retail credit/deposit book, increasing provisioning buffer and RoRWA (vs. RoA). The bank expects a credit growth rate in mid-single digit in FY21 and in mid-teens in FY22. NIMs may come under pressure in the near term due to low LDR and high impairment, but the planned high share of retail (65% vs. 52%) should be positive in the long run. IIB has raised LLP guidance from 225-250bps (ex-RSA) in FY21 to 350-400bps (incl. RSA) in FY21E, given its stance to accelerate specific PCR to ~70% (from 67% now) and 30% provision on RSA vs. regulatory requirement of 10%. Factoring in the provision up-fronting, we cut FY21E earnings by 22% but raise FY23 estimates by 5%. IIB has recovered from the deposit scare and the immediate risk of Vodafone default has eased. The Impact of Covid-19 on asset quality is inevitable but its stance to build high credit reserves even at the cost of near-term earnings is a right step.

Outlook

We retain Hold (TP Rs550) due to low valuations and reasonable capital position post recent capital raise.