Shares of private sector lender IndusInd Bank (IIB) have fallen over 13 percent in 2023 YTD and over 16 percent from its 52-week high of ₹1,275, hit in September 2022.
However, the challenges of the private lender seem to be in the past now. Domestic brokerage house Sharekhan has maintained its ‘buy’ call on the stock but has reduced its target price to ₹1,400, indicating an upside of 31.5 percent.
"IIB has addressed its past challenges related to asset quality and internal control issues. Additionally, its strategy to create counter-cyclical buffers would act as a cushion in the future. Asset-quality outlook is expected to be stable over the medium term, which should lead to lower slippages. Loan growth acceleration (shifting to growth pedal again) and credit cost normalisation over the medium term, given the revival in the macro environment, augur well for earnings growth going forward," said the brokerage.
The brokerage further pointed out that the lender's collection efficiencies and liquidity position are improving notably over the past few quarters. Focus on strong risk management framework and its strategy to create adequate provisions/counter-cyclical buffers will act as cushions in the future, it noted, adding that the asset-quality matrix is expected to improve, led by lower slippages from the standard book.
It expects loan growth acceleration, margins to remain stable, and credit costs to normalise in FY2024-FY2025E, which should drive a sharp recovery in earnings going forward.
It also observed that the bank has acknowledged the learning due to the challenges it faced in the past due to higher reliance on wholesale deposits and borrowings and believes that the focus would now shift back to business performance from hereon and re-rating would depend upon sustained earnings progression on guided lines.
Promoted by Hinduja Group, the bank is the fifth largest private bank in India. The bank has a strong pan-India presence with 6,352 touchpoints as of December 2022. The bank is a market leader in most product categories in the vehicle finance segment, which forms around 26 percent of overall loans. Overall, the retail-to-wholesale mix stands at 53:47. The bank is well-placed with adequate capital levels. The capital adequacy ratio (CAR) stands at 18.01 percent.
The stock is down nearly 13 percent in 2023 YTD, however, in the last 1 year, it has gained around 15 percent. In the last 3 years, the stock has rallied over 60 percent.
It has given negative returns in all 3 months of the current calendar year (including March till now).
The stock has fallen over 16 percent from its 52-week high of ₹1,275, hit in September 2022. Meanwhile, it hit its 52-week low of ₹763.75 in June 2022.
Focus remains on accelerating the loan growth: The brokerage noted that the lender's loan growth has started to accelerate (19 percent in 9MFY2023 vs 8 percent over FY2020-FY2022), driven by a strong SME (small& medium enterprises) and vehicle finance portfolio. Strong growth potential from a well-diversified loan book with a rising share of retail loans along with healthy capital ratios gives loan growth visibility. In the retail loan segment, vehicle finance and microfinance books are expected to be the growth boosters, stated the brokerage.
"The bank possesses strong domain expertise in its focus segments – vehicle and MFI business. Moreover, its underwriting practices have been tested in this segment as these portfolios have seen a down cycle. The large corporate book is expected to grow in line with the system growth. Moreover, the bank is investing in new growth engines such as affluent banking, NRI banking, tractor finance, affordable housing, and merchant advances. The bank is also speeding up its efforts to improve the retail liability franchise, which is a key positive. Retail deposits have gone up from 26 percent in FY2019 to 42 percent in 9MFY2023. Increasing share of retail deposits has been a key focus area for the bank, with 87 percent of incremental deposits over FY2020-9MFY2023 coming from retail deposits and CASA," it informed
Sharp recovery in earnings led by lower credit cost: As per the brokerage, collection efficiencies continue to improve across its core portfolio, led by a continued benign credit cycle. The bank reported higher credit cost at 3.8 percent/3.0 percent during FY2021-FY2022, while in 9MFY2023, credit cost has sharply fallen to 1.8 percent of average advances, it noted. Accelerated provisions made in the past few quarters, lower slippages, and additional non-NPA provision buffer towards the restructured book will enable further drop in credit cost and would drive strong earnings recovery, said Sharekhan. Its credit cost is expected to fall below 150 bps over FY2024-FY2025E, which is expected to lead to improved return ratios, it forecasted.
Key Risks: Economic slowdown due to slower loan growth, higher-than-anticipated credit costs, slow growth in retail liability franchise, and lower-than-expected margins, noted the brokerage.
Valuation: At the CMP, IIB trades at 1.3x and 1.1x its FY2024E/FY2025E BV estimates. A well-capitalised balance sheet, adequate internal risk-control measures placed, improvement in collection efficiencies across business segments, run down of the restructured book without much flowing into NPAs by Q1FY2024, steady asset-quality matrix and, in turn, lower credit costs would augur well for the bank’s return ratio profile, stated Sharekhan. It believes the strong recovery in earnings, improvement in liability franchise, and recovery in return ratios would help valuations inch higher.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.