Initial Coverage: IndusInd Bank

IndusInd Bank Ltd is in banking and para-banking services. The Bank is targeted on accepting deposits, which includes financial savings debts, current accounts and fixed deposits, and banking solutions. The Bank is engaged in granting loans to various segments, together with industries and corporations, and retail loans; financing a range of vehicles or system to people, and priority region lending. The Bank's segments consist of Treasury, Corporate / Wholesale Banking, Retail Banking and Other Banking Business. The Treasury segment consists of investment portfolios, profit or loss on sale of investments, income or loss on forex transactions, equities, income from derivatives and cash marketplace operations. The Corporate/Wholesale Banking section includes lending to and deposits from company customers. The Retail Banking section includes lending to and deposits from retail customers.

ABOUT:

• Founded in April 1994 under the visionary guidance of Srichand P Hinduja, a Non-Resident Indian entrepreneur and leader of the Hinduja Group, IndusInd Bank has rapidly ascended the ranks to become one of the most dynamic players in the Indian banking sector. A significant milestone in its evolution occurred in June 2004 when the bank underwent a merger with Ashok Leyland Finance, a prominent entity in India's leasing finance and hire purchase landscape.
• As of September 2023, IndusInd Bank boasts an expansive network comprising 2,631 branches and 2,903 ATMs strategically positioned across the nation. Extending its global reach, the bank also maintains representative offices in London and Dubai, diligently addressing the diverse needs of its clientele.
• The bank's footprint extends further through 3,492 branches of BFIL (Bharat Financial Inclusion) and 534 outlets dedicated to vehicle financing. With a robust customer base totaling 3.7 crore and a pervasive presence in over ~1.43 lakh villages, IndusInd has consistently demonstrated commendable financial performance. Over the years, it has achieved healthy Net Interest Margins (NIMs), effectively managed Non-Performing Assets (NPAs), and sustained operational excellence across various interest rate cycles.
• Renowned for its domain expertise in vehicle financing, microfinance, and the gems and jewelry business, IndusInd has diversified its offerings to include retail loans, credit cards, and business banking. These ventures have given rise to fee-generating verticals, contributing to improved return ratios. In personal banking, the bank provides an extensive array of products and services, encompassing deposits, loans, investments, insurance, forex services, demat services, online services, and wealth management.
• Catering to the needs of Non-Resident Indians (NRIs), the bank's NRI banking division facilitates money transfers and offers investment products such as international deposits, mutual funds, and online share trading. Furthermore, IndusInd Bank extends property solutions and insurance loans, underscoring its commitment to delivering comprehensive financial solutions across diverse segments.
• Key Strengths:

SHAREHOLDING PATTERN:

Shareholding Pattern and Credit Ratings:

MANAGEMENT: 

RISKS:

Asset quality remains subject to ongoing monitoring.

Historically, reported asset quality metrics for both corporate and retail segments have exhibited a narrow range, maintaining an overall Gross Non-Performing Assets (GNPA) between 1.0% and 1.2% from March 31, 2014, to December 31, 2018. However, since fiscal year 2019, the gradual slippage of some corporate accounts, coupled with the impact of COVID-19-related stress in the past fiscal year, led to a steady increase in gross NPA, reaching 2.9% as of June 30, 2021. Subsequently, there has been an improvement, with GNPA standing at 2.0% as of June 30, 2023. Despite this uptick, the bank boasts one of the industry's lowest GNPA figures, supported by a robust provision coverage of 71% and a provision buffer of Rs 1700 crore. The total loan-related provision stands at 2.4% as of June 2023. An analysis by CRISIL Ratings on the top 100 exposures, constituting around 45% of the total large and mid-corporate loan book, indicates a comfortable outlook for incremental slippages in the near term. Notably, the corporate segment has exposures to Real Estate developers, Hospitality, and Gems & Jewellery, while the retail side includes vulnerable segments such as microfinance (MFI) and vehicle finance. The restructured book accounts for 0.7% of total advances as of June 30, 2023, with corporate restructuring considered insignificant. However, the vehicle finance space remains a key area of restructuring concern as the portfolio expands, making the bank's ability to manage asset quality metrics a crucial monitoring factor.

The bank maintains a moderate resource profile.

Efforts have been made to fortify the resource profile by increasing the share of retail deposits. The overall deposit base for the bank witnessed a commendable 15% year-on-year growth, amounting to Rs 347,047 crore as of June 30, 2023. Despite this progress, a moderate reliance on bulk deposits and top depositors persists, although it is gradually diminishing. The Current Account Savings Account (CASA) ratio stood at 40.1% as of June 30, 2023. Concentration in the top 20 depositors has consistently decreased with the expansion of retail and small business deposits. The ratio of retail deposits and deposits from small business customers, as defined by the Liquidity Coverage Ratio (LCR), improved to 43% as of June 23, 2023 (compared to 41% as of June 30, 2022). The retail deposits ratio, encompassing Savings Accounts and term deposits below Rs 1 crore as a proportion of the total deposit base, stood at 46.5% as of March 31, 2023. The bank continues its focus on expanding the deposit base by tapping into other customer segments. Notably, the bank's liquidity position has significantly improved since FY20, benefiting from the increasing granularity and retailization of its deposits. However, the average cost of deposits for fiscal year 2023 was 5.3%, and for Q1 FY24, it stood at 6.1%, slightly higher than that of similar-rated peers. The bank's ability to sustain its retail deposit base while optimizing deposit rates will be a crucial aspect to monitor.

SECTOR POTENTIAL:

• India's credit-to-GDP ratio currently stands at approximately 55%, trailing behind developed nations and fellow BRICS countries. However, coupled with favorable demographics—where 67% of the population falls within the working-age bracket—this signals substantial potential for enduring credit growth in the long term.
• Recent insights gleaned from industry data, encompassing both news sources and management discussions, indicate a heightened demand for credit to fulfill working capital requirements. Consequently, IndusInd Bank has exhibited a commendable surge in corporate growth in the preceding quarters.
• Several retail segments are witnessing a buoyant appetite for loans, while both private and government sectors are poised to drive credit demand through capital expenditure (CAPEX) needs. Notably, the Union budget for FY23 disclosed a notable 35% spike in CAPEX outlay, further fueling the anticipation of increased credit demand on the corporate front.
• The Reserve Bank of India's (RBI) latest fortnightly release reports a robust 20% year-on-year growth in bank credit for September 2023. This positive momentum has been on a consistent upswing since the diminishing impact of the second wave of the pandemic.
• Anticipating a surge in auto sales, the vehicle finance segment is expected to gain traction, presenting a lucrative opportunity for IndusInd Bank, a significant player in this domain, to capitalize on this growth.

FINANCIALS:

• IndusInd Bank has exhibited a marginally superior growth in deposits compared to credit expansion, registering a commendable Compound Annual Growth Rate (CAGR) of 17.3% over the past five years.
• Positioned among the most promising private sector banks in India, IndusInd Bank boasts a substantial loan book size, standing at approximately ₹3.2 lakh crore as of September 2023. The bank has consistently delivered robust CAGR credit growth of 14.9% over the last five years, consistently outperforming industry benchmarks. Although the loan book experienced a minor setback with a 2.8% growth in FY21 due to the pandemic, there has been a steady resurgence in credit off-take since then.
• In the recent quarter, Q2 FY24, IndusInd Bank achieved an impressive loan growth of 21.3% YoY and 4.7% QoQ. This was primarily fueled by a 22.2% YoY surge in the Vehicle finance sector, a notable 34.4% rise in non-vehicle finance, and a substantial 17.6% YoY increase in corporate credit.
• The Net Interest Income (NII) for the bank has experienced a robust CAGR of 18.6% over the last five years, driven by enhancements in net interest margin. IndusInd Bank's Profit After Tax (PAT) has also demonstrated a commendable CAGR of 15.4% over the same period.
• There has been a consistent enhancement in Net Interest Margins (NIMs) for IndusInd Bank, facilitated by a reduction in the cost of borrowings. While deposit costs are catching up due to re-pricing, there is an anticipation of a check on borrowing costs, potentially impacting NIMs. In the most recent quarter, Q2 FY24, NIMs remained flat on a sequential basis at 4.29%, but witnessed a 5 basis points expansion on a YoY basis.
• Return on Equity (ROE) for IndusInd Bank has faced a decline in recent years due to events such as the pandemic and defaults in some infrastructure loans affecting net profit and subsequently, ROE. However, with ROE jumping to 14.4% in FY23 from 10% levels in FY22, there is optimism for future improvement. Anticipated factors include healthy business growth, strong asset quality, and improved cost ratios.
• The bank's Cost of Borrowing has significantly decreased, attributed to an improvement in credit rating and the influx of low-cost deposits, specifically Current and Savings Account (CASA) deposits. The Cost to Asset Ratio has consistently hovered around the 2.3% to 2.6% range and is expected to remain within this bracket.
• IndusInd Bank has witnessed a marginal rise in credit costs due to stress on the loan book. However, with the abatement of the pandemic's impact, there has been a notable reduction in provisions in FY23.
• Maintaining a robust Capital Adequacy Ratio (CRAR) well above regulatory requirements at 18.2%, IndusInd Bank stands well-prepared for an upswing in credit demand in the economy. This healthy CRAR ensures the bank's ability to capitalize on opportunities without necessitating substantial capital raising and dilution.

ESG HIGHLIGHTS:

VALUATION:

IndusInd Bank is presently trading at a Price-to-Book Value (P/BV) ratio of approximately 2x on a trailing twelve-month basis, aligning closely with its historical trend. While the bank's valuation stands apart from peers such as Kotak, HDFC, and ICICI, primarily due to slightly lower return ratios, there is potential for a significant re-rating should the bank enhance its operating performance in the future. Anticipating a surge in economic activity, credit growth is poised to escalate, particularly in the corporate segment, where demand for credit is on the rise. According to management projections, the bank envisions loan growth within the robust range of 18-23% over the next three years. With an ambitious target, the bank aims to expand its total customer base to 5 crore within the next two years. The flourishing automobile sector is expected to drive disbursements, capitalizing on the heightened demand in this segment. IndusInd Bank is strategically directing its focus towards the home loan segment, with aspirations to build a substantial book in the coming years. Specifically, the affordable housing book is targeted to reach ₹5,000 crore in the medium term. In terms of efficiency, the bank aims to stabilize the Cost-to-Income ratio around the 45% mark in the fiscal year 2024. Additionally, the credit cost is expected to remain within the range of 1.1% to 1.3% for the same fiscal year. As a result of these strategic initiatives and operational optimizations, the bank anticipates an improvement in return ratios, positioning itself favorably in the financial landscape. 

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