Tech­ni­cals

Dalal Street Investment Journal - - CONTENTS -

In­dusind Bank Lim­ited is one of the fastest grow­ing mid-sized pri­vate banks in In­dia. In­dusind Bank de­liv­ered over 43 per cent re­turns over a one year pe­riod alone, thereby pro­mot­ing in­vestors' in­ter­est. Here, at DSIJ, we present an ex­clu­sive anal­y­sis of In­dusind Bank Lim­ited.

COM­PANY OVERVIEW:

In­dusind Bank Lim­ited (IBL) is a Mum­bai-based new gen­er­a­tion In­dian bank that ob­tained a bank­ing li­cence in 1994 to be a part of the process of re­forms in the post-lib­er­al­i­sa­tion era in In­dia. The bank of­fers com­mer­cial, trans­ac­tional and elec­tronic bank­ing prod­ucts and ser­vices.

In­dusind Bank boasts of more than 1,000 branches and over 1,800 ATMS spread across the coun­try. Mum­bai has the max­i­mum num­ber of branches fol­lowed by New Delhi and Chen­nai. The bank also has rep­re­sen­ta­tive of­fices in Lon­don, Dubai and Abu Dhabi.

The bank's op­er­a­tional seg­ments in­clude trea­sury, cor­po­rate/whole­sale bank­ing, re­tail bank­ing and other bank­ing op­er­a­tions. The trea­sury seg­ment in­cludes in­vest­ment port­fo­lios, profit or loss on sale of in­vest­ments, profit or loss on for­eign ex­change trans­ac­tions, eq­ui­ties, in­come from de­riv­a­tives and money mar­ket op­er­a­tions. The Bank en­joys clear­ing bank sta­tus for both ma­jor stock ex­changes - BSE and NSE - and ma­jor com­mod­ity ex­changes in the coun­try, in­clud­ing MCX, NCDEX, and NMCE.

IN­DIAN BANK­ING SEC­TOR - AN OVERVIEW

Due to strong eco­nomic growth, ris­ing dis­pos­able in­comes, in­creas­ing con­sumerism and eas­ier ac­cess to credit, credit off-take has been surg­ing over the past decade. As of March 2017, to­tal credit ex­tended reached US$ 1,223.81 bil­lion. De­mand has grown for both cor­po­rate and re­tail loans; par­tic­u­larly the ser­vices, real es­tate, con­sumer durables and agri­cul­ture al­lied sec­tors have led the growth in credit.

Dur­ing FY06–17, de­posits grew at a CAGR of 12.03 per cent, reach­ing 1.54 tril­lion by FY17. De­posits un­der Prad­han Mantri Jan Dhan Yo­jana (PMJDY), have also in­creased. As on Fe­bru­ary 2017,

665 bil­lion were de­posited, while 270 mil­lion ac­counts were opened.

Ac­cess to bank­ing sys­tem has also im­proved over the years due to per­sis­tent ef­forts of the gov­ern­ment to pro­mote bank­ing-tech­nol­ogy. The ad­vance­ments in tech­nol­ogy have brought the mo­bile and in­ter­net bank­ing ser­vices to the fore. In or­der to en­hance the cus­tomer’s over­all ex­pe­ri­ence, the bank­ing sec­tor is lay­ing greater em­pha­sis on up­grad­ing their tech­nol­ogy in­fra­struc­ture.

De­spite global up­heavals, In­dia’s bank­ing sec­tor has re­mained sta­ble, thereby re­tain­ing pub­lic con­fi­dence over the years. En­hanced spend­ing on in­fra­struc­ture, speedy im­ple­men­ta­tion of projects and con­tin­u­a­tion of re­forms are ex­pected to pro­vide fur­ther im­pe­tus to growth.

Merger with Bharat Fi­nan­cial In­clu­sion :In­dusind Bank has en­tered into an ex­clu­sive ar­range­ment with Bharat Fi­nan­cial In­clu­sion (BFI) to strike out a merger deal by the end of the cur­rent fi­nan­cial year. BFI is In­dia's sec­ond largest mi­cro­fi­nance com­pany, with a gross loan port­fo­lio of 9,630 crore in the first quar­ter of FY18. The merger is likely to help IBL ex­pand its mi­cro­fi­nance loan book about three times, a tar­get that IBL was seek­ing to achieve in the next three to four years. Af­ter the merger, mi­cro­fi­nance loans will in­crease to around

10,000 crore and con­sti­tute around 9 per cent of In­dusind Bank's to­tal loan book from 2.5 per cent cur­rently. The merger would also help In­dusind Bank to ex­pand by around 1,400 branches.

FI­NAN­CIALS:

In­dusind Bank posted firm core busi­ness per­for­mance in Q1 FY18. The bank’s net in­ter­est in­come grew 6 per cent QOQ and 31 per cent YOY to 1774 crore. Its fee in­come de­creased 4 per cent QOQ and in­creased 20 per cent YOY to 1167 crore. IBL’S rev­enue stood at 2941 crore, in­creas­ing 26 per cent YOY and 2 per cent QOQ, while the op­er­at­ing profit grew 29 per cent YOY and 1 per cent QOQ to

1589 crore. The bank’s net profit soared 26 per cent YOY and 11 per cent QOQ to

837 crore. IBL posted a cost-to-in­come ra­tio of 45.99 per cent as against 47.03 per cent in Q1FY17. Prof­itabil­ity growth has come on ac­count of sta­ble yields, in­creas­ing share of good qual­ity loan book, in­creas­ing cur­rent ac­counts and sav­ings ac­counts (CASA) and im­prove­ment in op­er­a­tional ef­fi­ciency.

The bank's CASA has shown im­prove­ment, com­ing at 37.8 per cent for the quar­ter, up by about 90 bps QOQ and

340 bps on YOY ba­sis. Its sav­ings ac­count (SA) de­posits have grown 17 per cent QOQ and 65 per cent on YOY ba­sis, whereas cur­rent ac­count (CA) de­posits have de-grown 3.4 per cent on QOQ ba­sis and about 19 per cent on YOY ba­sis. In or­der to build CASA trac­tion, the com­pany is ex­pand­ing its branch net­work and fo­cus­ing on tar­get mar­ket seg­ments like gov­ern­ment busi­ness, key non-res­i­dent mar­kets, self-em­ployed, emerg­ing cor­po­rate busi­nesses, etc.

Driven by credit growth of 24 per cent to 1,16,407 crore and steady net in­ter­est mar­gin (NIM) of 4 per cent, non-in­ter­est in­come grew at 20 per cent YOY and 6 per cent QOQ . The bank does not have any large ex­po­sure to 12 ac­counts re­ferred to Na­tional Com­pany Law Tri­bunal (NCLT). Ac­cord­ing to the man­age­ment, the ex­po­sure is merely 50 crore and the ac­counts are sub­stan­tially pro­vided for. The com­pany’s rev­enue-to-em­ployee ra­tio in­creased from 38 in Q1FY17 to 47 in Q1FY18.

DI­VER­SI­FIED LOAN BOOK:

IBL’S to­tal credit book stood at 11,6407 crore in Q1FY18. The trac­tion in credit off­take has been strong at 27 per cent CAGR in the past six years which is way ahead of the in­dus­try's 18 per cent CAGR. The com­po­si­tion of the loan book is ideal. The con­sumer fi­nance (CF) book ac­counts for 40.5 per cent, whereas cor­po­rate bank­ing book (CB) ac­counts for 59.5 per cent. Go­ing ahead, the bank plans to main­tain 1:1 dis­tri­bu­tion of the to­tal loan be­tween CF and CB books. Go­ing for­ward, the CF book is ex­pected to be a ma­jor driver of over­all loan book trac­tion.

The CF book, amount­ing to 47,095

crore as on Q1FY18, is largely ve­hi­cle fi­nance fo­cused, which con­trib­uted about 75 per cent of CF book.

IBL’S CB book at 69,312 crore as on Q1FY18 is largely in­clined to­wards work­ing cap­i­tal fi­nance. The book is fur­ther di­ver­si­fied into three ma­jor cat­e­gories: large cor­po­rate, mid-cor­po­rate and loans to small busi­ness con­sti­tut­ing 28 per cent, 20 per cent and 12 per cent, re­spec­tively. Also, in terms of sec­tors, the CB port­fo­lio is well di­ver­si­fied among more than 13 sec­tors, with gems and jew­ellery, lead­ing with 5.66 per cent, fol­lowed by lease rental at 3.62 per cent and power gen­er­a­tion at 2.56 per cent.

AS­SET QUAL­ITY

The bank has been in­creas­ing its lend­ing qual­ity. The gross non-per­form­ing as­set (GNPA) and net non-per­form­ing as­set (NNPA) ra­tios have de­clined from 3.1 per cent and 2.3 per cent, re­spec­tively, in FY08. Ow­ing to IBL’S pe­cu­liar loan mix, the GNPAS and NNPAS have re­duced to 1 per cent and 0.3 per cent, re­spec­tively, by FY11. The ra­tios have re­mained at th­ese lev­els cur­rently. Dur­ing Q1FY18, to­tal slip­pages re­main high at 608 crore as com­pared to 634 crore seen in Q4FY17. In Q1FY18, it was mainly led by higher slip­pages from the con­sumer seg­ment at

257 crore vis-à-vis 177 crore in Q4FY17. Go­ing for­ward, the bank is ex­pected to con­tain as­set qual­ity de­te­ri­o­ra­tion.

DI­VER­SI­FIED OTHER IN­COME:

IBL’S other in­come con­sti­tutes nearly 40 per cent of its op­er­at­ing in­come. In other in­come, the ma­jor com­po­nent is the fee in­come that ac­counts for about 90 per cent. Var­i­ous sources of fee in­come in­clude dis­tri­bu­tion fees, gen­eral bank­ing, trade and re­mit­tances, forex in­come, loan pro­cess­ing fees and in­vest­ment bank­ing.

On the val­u­a­tion front, the bank main­tained a P/E ra­tio of 33.85x, as against its peers such as State Bank of In­dia (105.52x), Axis Bank (36.31x) and HDFC Bank (22.8x). The com­pany’s P/B ra­tio stood at 4.88x, against its peers' State Bank of In­dia (1.15x), Axis Bank (2.18x) and HDFC

Bank (5.05x) The bank’s ROE stood at 15.05 per cent in Q1FY17, which has in­creased to 16.17 per cent in Q1FY18. How­ever, the com­pany’s ROA de­creased from 1.94 per cent in Q1FY17 to 1.86 per cent in Q1FY18.

REC­OM­MEN­DA­TION:

By main­tain­ing its yield on as­sets and NIMS at 4 per cent and lend­ing to­wards good qual­ity as­sets, we be­lieve the bank has a strat­egy in place to grow it­self prof­itably. Also, the pos­i­tive out­look for the bank­ing sec­tor and the merger with BFI au­gurs well for the bank. We ex­pect In­dusind Bank to out­per­form the in­dus­try and be amongst the top pri­vate banks in the coun­try. We rec­om­mend BUY on the stock for our reader-in­vestors.

DI­VER­SI­FIED LOAN BOOK:

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