Buy IndusInd Bank; target of Rs 1920: Edelweiss

Edelweiss' research report on IndusInd Bank

In Q2FY18, IndusInd Bank (IIB) continued to clock consistent and operationally strong earnings despite a volatile environment. Key positives: a) CASA: Savings growth accelerated (up >95% YoY, >25% QoQ) leading to >42% CASA ratio (surpassing 40% target set for FY20); b) despite funding cost benefit, NIMs were kept steady (at 4%) in a bid to move up the quality curve; c) in line with Phase-4 target, benefits of operating efficiency have started to play out; d) GNPLs were stable at 1.08%, with slippages curtailed at 1.7% (2.2% in Q1FY18) and credit cost at sub-40bps despite enhancing coverage to 65% towards accounts in RBI’s 2 lists; and e) robust core fee income at >23% led to >25% YoY core operating surge. We believe, IIB is structurally poised to achieve Phase-4 targets and repeat success of earlier phases. Merger with BhaFin may increase volatility, but MFI book will still be at a manageable ~10% of loans. Given strong track record, superior RoA and well-capitalised position, execution risks are minimal. Maintain ‘BUY’.

Outlook

IIB has delivered yet another strong quarter. More commendable is that it is now delivering a mix of high & stable earnings growth, balance sheet has strengthened and the outlook is favourable. This is likely to lead to highest end of private bank valuations. Hence, we raise target multiple to 4.2x (from 3.8x) FY19E P/BV, leading to revised TP of INR1,920 (earlier INR1,734). We maintain ‘BUY/SP’.

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