Buy IndusInd Bank, target Rs 1,800: Prabhudas Lilladher
Buy IndusInd Bank Ltd. at a price target of Rs 1800.0 .
Prabhudas Lilladher has given a buy recommendation on IndusInd Bank (IIB) with a target price of Rs 1,800.
Shares of IndusInd Bank traded at Rs 1,428.4 around 1:35 pm on 2 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.
Investment rationale by the brokerage-
Merger to boost NIMs, operational impact to be gradual
As per the brokerage, with the merger-of Bharat Financial with IIB, NIMs will improve 30-40bps on immediate basis, taking overall NIMs to nearly 4 per cent. This will be led by accrual on overall yields by 70-80bps.
While cost of funds will be up by nearly 50bps, IIB can re-finance borrowings in order to cut it down. Operationally benefits of the merger will accrue over time especially on opex and CRWA, while fee income might witness slowdown.
Liability franchise has been strengthening by the year
Liabilities franchise is being ignored in the current de-rating of IIB. The bank has been able to continuously build strong liability franchise year over year.
In last ten years, the bank added over 2 times CA market share to 3 per cent of SCBs, more than 1.3 times addition in SA market share to 1.5 per cent of SCBs and doubled its overall deposit market share to 1.7 per cent of SCBs and all three metrics have grown at CAGR of 27-29 per cent.
Market share gain has been possible due to strong addition to liability customer base and robust uptick in average deposit balances, largely helped by diverse asset products.
With Bharat Financial, bank’s missing piece of rural and semi urban presence is now complete, helping granularity in liabilities and sustained growth.
Asset quality concerns should subside
Recent concerns especially post IL&FS have exacerbated quality of corporate loan book build in last two years with high concentration in some riskier segments like Jewellery/NBFC-HFCs/MFI/RE.
Additional apprehension comes from the disclosed risky book of 1.9 per cent of loans which can slip into NPA or see ballooning, leading to higher credit cost.
From its last many quarters disclosures, bank’s ‘BBB- & below’ rating portfolio has continued to remain at 6-7 per cent of exposures, while a large part of exposure continues to remain ‘A rated & above’. Hence concerns on asset quality should start subsiding in next few quarters.
Well positioned over medium term with better return ratios & capital
Strong loan growth of over 25 per cent (with diversification), better NIMs of 4 per cent and strong retail franchise on deposits and loans will help move back return ratios to 17-18 per cent by FY21. Also, strong capital position with Tier-I of 15 per cent (incl. warrants) gives additional comfort on balance sheet.
"We believe recent noise on asset quality might remain a niggling issue in near-term especially as MD and CEO’s current term ends in next 3-4 months’ time. We have presumed that post-merger benefits could be utilized for additional contingency provisions and on conservative basis incorporate credit cost of 100bps in our estimates for FY20 versus guidance of 60bps. This should cushion hits to balance sheet from asset quality deterioration in near term," said the brokerage.
Despite issues, the bank is well positioned with return ratios of 17-18 per cent and strong earning per share CAGR of 32 per cent over FY19-FY21.
IIB now trades at 16 per cent discount to its LTA, although re-rating needs improved visibility on asset quality and successor to existing CEO.
"We retain buy with revised target price of Rs 1,800 (from Rs 1,832) based on 2.9 times Mar-21 ABV (from 3.2 times Mar-21 ABV) as we incorporate Bharat Financial and issue of warrants (Rs 2,700 crore) in our estimates," the brokerage said.
Shares of IndusInd Bank traded at Rs 1,428.4 around 1:35 pm on 2 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.
Investment rationale by the brokerage-
Merger to boost NIMs, operational impact to be gradual
As per the brokerage, with the merger-of Bharat Financial with IIB, NIMs will improve 30-40bps on immediate basis, taking overall NIMs to nearly 4 per cent. This will be led by accrual on overall yields by 70-80bps.
While cost of funds will be up by nearly 50bps, IIB can re-finance borrowings in order to cut it down. Operationally benefits of the merger will accrue over time especially on opex and CRWA, while fee income might witness slowdown.
Liability franchise has been strengthening by the year
Liabilities franchise is being ignored in the current de-rating of IIB. The bank has been able to continuously build strong liability franchise year over year.
In last ten years, the bank added over 2 times CA market share to 3 per cent of SCBs, more than 1.3 times addition in SA market share to 1.5 per cent of SCBs and doubled its overall deposit market share to 1.7 per cent of SCBs and all three metrics have grown at CAGR of 27-29 per cent.
Market share gain has been possible due to strong addition to liability customer base and robust uptick in average deposit balances, largely helped by diverse asset products.
With Bharat Financial, bank’s missing piece of rural and semi urban presence is now complete, helping granularity in liabilities and sustained growth.
Asset quality concerns should subside
Recent concerns especially post IL&FS have exacerbated quality of corporate loan book build in last two years with high concentration in some riskier segments like Jewellery/NBFC-HFCs/MFI/RE.
Additional apprehension comes from the disclosed risky book of 1.9 per cent of loans which can slip into NPA or see ballooning, leading to higher credit cost.
From its last many quarters disclosures, bank’s ‘BBB- & below’ rating portfolio has continued to remain at 6-7 per cent of exposures, while a large part of exposure continues to remain ‘A rated & above’. Hence concerns on asset quality should start subsiding in next few quarters.
Well positioned over medium term with better return ratios & capital
Strong loan growth of over 25 per cent (with diversification), better NIMs of 4 per cent and strong retail franchise on deposits and loans will help move back return ratios to 17-18 per cent by FY21. Also, strong capital position with Tier-I of 15 per cent (incl. warrants) gives additional comfort on balance sheet.
"We believe recent noise on asset quality might remain a niggling issue in near-term especially as MD and CEO’s current term ends in next 3-4 months’ time. We have presumed that post-merger benefits could be utilized for additional contingency provisions and on conservative basis incorporate credit cost of 100bps in our estimates for FY20 versus guidance of 60bps. This should cushion hits to balance sheet from asset quality deterioration in near term," said the brokerage.
Despite issues, the bank is well positioned with return ratios of 17-18 per cent and strong earning per share CAGR of 32 per cent over FY19-FY21.
IIB now trades at 16 per cent discount to its LTA, although re-rating needs improved visibility on asset quality and successor to existing CEO.
"We retain buy with revised target price of Rs 1,800 (from Rs 1,832) based on 2.9 times Mar-21 ABV (from 3.2 times Mar-21 ABV) as we incorporate Bharat Financial and issue of warrants (Rs 2,700 crore) in our estimates," the brokerage said.
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