IndusInd: Good show amid weak sector trends

Organic growth was largely in line with estimates, with the bank delivering across parameters

Even as the performance of IndusInd Bank is strictly not comparable to its year-ago numbers due to the acquisition of Royal Bank of Scotland (RBS)’s diamond and jewellery financing business, its September 2015 quarter show was in line with its consistent past trackrecord. The performance was fuelled by healthy growth in loan book, and core fee income, as well as net interest margin (NIM), and, importantly, stable asset quality.

In an environment where most banks are faced with a lack of demand for loans, IndusInd’s loan growth of 30.6 per cent is enviable. Even after excluding the numbers of RBS’ jewellery financing business (integrated in July), organic growth in loans stood at 23.7 per cent, in line with its own trend in recent quarters. This aided net interest income, which grew 31.3 per cent year-on-year (y-o-y) to ~1,094 crore, partly helped by slow pace of increase in interest expenses.

Since the bank did not cut its base rate in the quarter even as its cost of deposits moved south, margins got a leg-up. The jewellery financing business earns slightly better yields on loan, which added to the net interest margins (NIMs) as well as return on assets ratio, a trend analysts believe will sustain. IndusInd’s NIMs, thus, expanded by 25 basis points yo-y to 3.9 per cent.

Even as the bank trims its base rate and migrates to the new mechanism of calculating base rate, analysts expect its NIMs to be flattish. Suresh Ganapathy, financials analyst at Macquarie Capital, says, “We expect IndusInd Bank’s NIMs to remain flattish. The impact of base rate cut is limited as 72 per cent of their loan book is on a fixed rate basis.” Management also says the fall in cost of funding will more than compensate for these margin pressures. At a time when many banks are seeing some kind of pressure on margins, a flattish trend might not be as bad as it sounds.

Double-digit y-o-y growth in trade and remittances, distribution fees, etc led to a strong 24 per cent growth in core fee-income to ~673 crore for the quarter. Asset quality, too, remained largely stable, with gross non-performing assets (NPA) ratio at 0.8 per cent and net NPA ratio at 0.3 per cent.

IndusInd Bank’s scrip, though, fell 0.7 per cent on Friday to ~939 versus a 0.9 per cent gain in the Sensex. This could be on account of some profit-booking in the stock, which has gained 11 per cent gains versus the BSE Bankex’s 1.6 per cent (since the start of September).

Given its record, asset quality, high return ratios, well-capitalised balance sheet and future prospects (earnings estimated to grow 25 per cent each for the next two years), most analysts remain positive on IndusInd Bank. Investors could accumulate on dips.