IndusInd Bank rating: Buy — The focus on deposits will aid re-rating

FY20 AR shows slippages were high; EPS upgraded to factor in capital raise; ‘Buy’ maintained with TP of Rs 760

IIB’s annual report for FY20 highlights heightened focus to improve deposit profile with client-acquisition, higher-rates & balanced ALM. RWA/asset rose by 700bps y-o-y to 84%, reflecting selldown to well-rated loans & ratings downgrade in corp. loans. Lower reliance on wholesale funds & cost will support asset growth prospects with balanced risks. Slippages were high in FY20, and we stay cautious over FY21-22. We build the capital raise and stay with Buy call.

Focus on improving quality of deposits
Management is clearly prioritising to retailise deposits through a combination of client acquisition, deepening of relationships through their relationship management and higher rates. We note that IIB not only offers 160-190 bps higher term-deposit rates, but has actually raised rates when market made cuts. This might put some pressure on margins. Retail deposits grew by 34% y-o-y, but share in total is lower than peers and even as deposit concentration fell marginally due to loss of share in select Govt./Corp. accounts it is much higher than peers. Deposit outflows have stabilised post Q1, but new norms on current account deposits pose some challenge. Bridging of gap in ALM-profile is a positive and will help reduce margin volatility.

Risk-weighted/total asset rise; off-balance sheet higher than peers
During FY20, RWA/asset ratio rose by 700bps y-o-y to 84% due to selldown of highly-rated loans in Q4, ratings downgrade for some larger exposures, rise in loans to commercial real estate and decline in loans to PSUs. Compared to FY19, mgt. has turned cautious on lending in segments like business banking loans and LAP. IIB’s off-balance sheet liabilities at +300% of assets are higher than peers and drive its higher fee/asset; share gains from foreign banks has helped.

Slippages high; some buffer on provisions
During FY20, slippages stayed high at 3% of past year loans due to downgrades in corporate sector; this pushed up credit costs to 2.4% of avg. loans that dragged profits. Seasoning details of NPLs show that bank has some buffer on NPL-provision and has made contingent provisions. We keep credit costs elevated for FY21-22 to factor in risks post Covid; we understand collections in MFI and CV segments are doing better than industry.

Maintain BUY
We incorporate capital raise of Rs33 bn (9% of Q1 net worth) into estimates with some upgrade to earnings. Improvement in deposit franchise and clarity on exposure in telecom sector will abate concerns & aid rerating. We maintain Buy with TP of Rs 760 based on 1.4x Jun-22 adjusted PB.