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The bank has been able to maintain steady asset quality in spite of its exposure to truck financing.
August 3, 2013:
Recent measures taken by the Reserve Bank of India (RBI) to curb liquidity and arrest the steep fall in the rupee have sent most banking stocks hurtling down. Among those that have borne the brunt is IndusInd Bank, which has corrected 16 per cent in the last one month.
The concern has been due to the bank’s higher dependence on costlier wholesale short-term deposits. This could increase its cost of funds in the near term and impact its net interest margin (NIM).
While NIM may see some pressure in the short term, the long term prospects of the bank still seem strong. Its earnings have grown at an annual average of 45 per cent over the past three years.
The bank has improved its return on assets significantly from 1.1 per cent in 2009-10 to 1.8 per cent bringing it on par with most leading private sector banks.
A growing and well diversified loan book, improving low-cost deposit mix and stable asset quality will aid the bank achieve earnings growth of around 25 per cent over the next two years.
IndusInd, the sixth-largest private sector bank in the country has always traded at a premium to ICICI Bank and Axis Bank, growing much faster than its peers. Before correcting, the stock was trading close to three times its one-year forward book value.
The stock now trades at 2.3 times, which is close to its historical average. Given the growing scale of business and healthy profitability, the stock offers investors a good opportunity to invest with a two- to three-year horizon.
After the organisational re-structuring in 2008, IndusInd Bank has grown at a healthy pace, focussing on growth as well as profitability. The loan book has grown at 29 per cent annually over the last three years. The bank’s current loan portfolio is split almost equally between the corporate and retail segments. The mix gradually improved in favour of the more profitable retail segment over the past three years, with retail now contributing 49 per cent of loans from 40 per cent in 2009-10.
The corporate book in itself is well diversified with the largest single exposure capped at 3.6 per cent to non-banking financial companies. Within the retail segment, nearly half comes from commercial vehicle (CV) financing.
IndusInd acquired the vehicle finance business from Ashok Leyland in 2004, which helped it build a strong network.
The CV financing segment in the country has grown by 35 per cent annually over the last three years. In spite of the slowdown in CV sales, the bank’s lending in this segment has grown, thanks to its diversification from the medium and heavy vehicles segment to light commercial vehicles and used CV segment.
The bank has also diversified into other segments, such as loans to utility vehicles, two-wheelers and cars. Further expanding its retail offerings, the bank has been rolling out new products, such as loan against property and credit cards.
Despite a strong run in the past three years, there is still opportunity for the bank to grow its loan book. IndusInd Bank continues to expand its network aggressively. It plans to add close to 130 new branches this year, which is 25 per cent of its existing branches. The bank’s relatively small loan book size and less than 1 per cent of market share in loans will drive around 25 per cent loan growth over the next two years
IndusInd has been building its retail presence, by expanding branches aggressively. Over the last three years, it has more than doubled its branches. Also, following the deregulation of interest on savings accounts from October 2011, the bank has been among the few to offer higher interest rate on savings bank deposits.
These initiatives have seen a significant improvement in the bank’s low-cost current account and savings account (CASA) ratio. From 24 per cent in 2009-10, the share of CASA has gone up to 30 per cent in the quarter ending June this year.
The CASA of each branch for IndusInd Bank still remains at Rs 30 crore, lower than private sector peers, such as ICICI Bank at Rs 38 crore and HDFC Bank at Rs 44 crore. IndusInd can further leverage its existing branch network to improve its market share in CASA deposits.
The bank’s NIMs have scaled up significantly from 2.9 per cent in 2009-10 to 3.7 per cent currently. The recent spike in short-term cost of borrowings may impact margins.
However, theimproving CASA ratio should help offset some of these pressures. We expect the margins to range between 3.5 and 3.6 per cent in the medium term.
The bank has been able to maintain steady asset quality in spite of its exposure to CV financing. As of the quarter ending June, the gross non-performing assets stood at 1.06 per cent – only a marginal increase from the March quarter.
The restructured asset level is also comfortable at 0.28 per cent of loans. Thanks to healthy treasury income, the bank was able to make additional provisions for bad loans during the quarter ending June.
This took the provision coverage ratio to 80 per cent of non-performing assets. In any case, the bank has been maintaining a steady coverage of around 70 per cent in the past.