IndusInd Bank Share Price: IndusInd Bank’s valuation has seen wide swings in the last two and a half years with peak one year forward P/BV of 4.4x in Aug-18 to lows of 0.6x in Mar-20 and currently at 1.6x as many factors from liability to asset quality risk emerged over this short period of time. While liability is no longer a concern, confidence on asset quality is not fully restored.
Nevertheless, based on management interaction (confident of credit cost normalization in FY22), economic recovery and various dispensation/support measures unfurled to tame stress, Antique Broking think credit cost could be managed within 3.5-4% of loans of which bank has so far absorbed 0.8-1% and intent of aggressive cleanup/provisioning in second half of FY21 could lead to ROA normalizing to 1.5% in FY22 and ROEs to move towards 13%. Significantly, Antique Broking downgrades FY21 earnings by 19% but upgrades FY22/23 estimates by 14-15% and retains Hold with revised Target Price of Rs 925 (Rs 670 earlier).
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IndusInd Bank Asset quality pressure can persists but seems to be lower than anticipated:
Management stays confident on its corporate exposure (re-iterated its comfort on its BBB and below exposure and non-fund based exposure), especially its real estate and gems and jewellery exposure and expects overall asset quality outcome to be manageable as collection efficiency in consumer business too is improving.
Accelerated IndusInd Bank provisioning to ease credit cost post 2-3 quarters:
Management aims to recognize its asset quality pressures by accelerating credit cost in FY21 and start FY22 on a clean note. Antique Broking thinks that IndusInd Banks Covid related credit cost impact could be in the range of 3.5- 4% of loans, of which bank has covered 0.8% in first half of FY21 and are building 1.8% further in second half of FY21, paving way for much normalized credit cost in FY22.
IndusInd Bank still ranks low in order of preference:
IndusInd Bank upgrade is driven by valuations in context of expected return ratios and improving asset quality outlook but comfort is relatively lesser vs. peers on account of:
(1) Strong growth in corporate lending in the last cycle due to which asset quality performance could be volatile
(2) Differentiation in return ratios vs. larger peers was helped by corporate fees and higher share of non-fund based exposure, which may not return soon
(3) Relatively weaker liability franchise
(4) While core PPP/average assets is higher than peers but adjusted for RWA, it is in-line with or lower than peer