IndusInd Bank Rating: buy; Sustenance of book quality augurs well

We hosted SV Parthasarthy (Head, Consumer Finance) & Sanjay Mallik (Head Strategy & IR) for investor calls where they highlighted that the bank’s restructured book may be near low-single-digit % of loans. Provisioning may be elevated in H2FY21 as the bank covers for downgrades & some buffer-provisions. Lower concentration, on assets & liabilities, are key medium-term targets. Warrants are due for conversion in January-21 at Rs 1,709/ sh that can add 5% to capital.

Collections holding up, but provisioning will normalise after H2FY21: IIB’s loan collection levels have continued to be healthy (95-96%) and mgmt continues to guide for low single-digit restructuring on overall loans. It believes legacy corporate stressed exposures (pre-Covid) have largely been dealt with and incremental exposures are of good quality. Unsecured exposures in retail (MFI and credit cards) which are under stress will be dealt with upfront through downgrade/ provisioning, and restructuring in retail largely relates to pockets which have been severely affected (passenger buses, hospitality, etc). Mgmt expects credit costs to remain elevated through H2FY21 as it will continue to provide for stress preemptively, while this should normalise towards FY22.

Effort to granularise both sides of balance sheet: Mgmt continues to work towards granularising both IIB’s deposit and asset franchises. On the corporate loan front, it has been engaged on reducing chunky exposures – this will have an impact on fees. Simultaneously, mgmt is working towards increasing the share of retail deposits (33% of deposits currently).

IIB is still offering pre-Covid levels of interest rates on retail term deposits even as larger peers have cut them by 80-130bps. Initiatives on retail deposit side and unwind of corporate deposits will help bring down concentration and costs.

IWG report permits promoters to raise stake; warrant conversion will address doubts: The IWG report recommends a uniform cap of 26% for bank promoters – IIB promoters hold 13.5% stake in the bank (14.7% ex-GDR in base). Promoters also hold 15.8 mn warrants (2% of existing shares), which will lapse in Jan-21. These warrants convert at Rs1,709/sh and 25% has already been paid upfront in Jul-19. If promoters convert these warrants into shares, it will not only lift net worth by Rs 20 bn or 5%, but will also address doubts.

Raise earnings estimates and TP: We raise our earnings forecasts for FY22-23 by 3-5% factoring in lower credit costs and better topline. Valuations are still at discount to past average and improvement in growth/quality outlook can drive rerating. We also raise our TP to Rs 1,030 based on 1.8x Sep-22 adjusted PB (from Rs 800 earlier that was based on 1.4x adjusted PB). Buy stays.