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Continued robust operating performance
* IndusInd Bank (IIB IN) reported strong performance on most operating parameters as advances grew by 35% YoY led by wholesale loans which grew 39% YoY while retail loans grew 29%. Core fee income decelerated to 17.5% YoY on the back of SEBI guideline which requires amortizing of mutual fund distribution fee. During Q3FY19, three major accounts slipped out of which two accounts belonged to EPC and construction which led to 4bp increase in GNPA to 1.13%. Management said that they have received report from RBI and they do not need to report any divergence. As per management, the bank now only awaits for NCLT approval for their merger with BHAFIN. The merger will be effective from 1Jan2018.
* Additional contingent provision of Rs.2.6Bn for IL&FS: During Q3FY19, management continued to provide provisions on its exposure towards IL&FS at Rs.2.55Bn as contingent provision. As on Q3FY19, management has provided Rs.6Bn (30% PCR) including floating provision towards its exposure towards holding company of IL&FS. Management guided, it may require additional 10-20% provisioning on its holding company exposure while the account still remain as standard accounts in the books. Though it does not expect any haircut on SPVs.
* Margins to improve from FY20: Margins (reported) remained stable at 383bp (-1bp QoQ). Management guided margins may remain flat in Q4FY19 but may witness an improving trajectory given repricing of MCLR and new business at higher rates. During last two quarters corporate yields grew by 66bp to 9.82%.
* Earnings outlook: We trim our margins factoring in tighter liquidity going ahead and increased deposit & lending rates and increase in other provision by considering 50% haircut on IL&FS holding company and 10% haircut in SPVs in our FY19 estimates. We expect RoA on a merged basis to be 2.0% in FY20E & 2.1% in FY2021. This implies 29% EPS CAGR over FY18-21E.
* Valuations and target price: IIB trades at 3.2x P/ABV and 16x P/E 1-year forward. The opportunity of expanding profitability and robust growth is factored into our DDM-based target price of Rs2,023, implying a 26% upside meriting a BUY rating on the stock.
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