IndusInd Bank Q2 Review: Analysts Say Legacy Stress Covered, See Growth Ahead
IndusInd Bank Ltd. has managed to cover itself against the legacy stress built over the last few years, preparing for a period of growth, according to analysts.
The optimism comes despite elevated slippages and higher-than-anticipated restructuring owing to Covid-19.
The private bank's net profit for the second quarter jumped 73% year-on-year on higher income and lower provisions. Its asset quality improved sequentially.
Shares of IndusInd Bank rose 8.70% in early trade on Thursday. Of the 51 analysts tracking the company, 46 recommend a 'buy', three suggest a 'hold' and two have a 'sell' call, according to Bloomberg data. The overall consensus price of analysts tracked by Bloomberg implied an upside of 7.2%.
Here's what brokerages have to say about IndusInd Bank's second-quarter performance:
Target price revised to Rs 1,420 from Rs 1,260 per share.
Gross slippages of Rs 2,660 crore largely came from the bank's microfinance (Rs 1,070 crore) and auto finance (Rs 590 crore) books.
In comparison, upgrades worth Rs 1,140 crore, recoveries worth Rs 320 crore, write-offs worth Rs 430 crore and sale to asset reconstruction companies worth Rs 700 crore aided the asset quality improvement.
With uptick in collection efficiency, incremental stress will be lower. With recoveries likely to pick up in second half of FY22, gross NPAs too should settle lower.
Restructured loan pool remains elevated, but borrowers representing over 90% of restructured loans are honouring obligations.
As a matter of prudence, it has created 20% provisioning on restructuring in vehicle financing, 10% in secured retail lending and 50% in unsecured lending.
Apart from provision coverage ratio, the bank created further contingency provisioning of Rs 1,130 crore taking cumulative non-PCR contingency provisioning to Rs 3,180 crore.
Given accelerated deposit traction, surplus liquidity and tier-1 capital of over 15%, the bank is well-equipped to register growth going ahead.
Target price revised to Rs 1,170 per share from Rs 360 before.
Fresh disbursements across products improved in the second quarter, reaching pre-Covid-19 levels.
Despite the challenging auto industry volume growth, the bank saw disbursements at an all-time high. It remains cautious on two-wheeler and small commercial vehicle loans.
Strong fee momentum offset lower non-interest, non-fee income.
Collection efficiency improved to 98% compared with 96% in Q1, except in the microfinance portfolio.
Stress from legacy corporate assets had been duly provided for and the focus for the bank will be future growth.
Credit cost estimated to remain elevated due to potential stress from restructured loans. The street will watch the asset quality of the restructuring book closely.
Target price revised to Rs 1,460 per share from Rs 1,375 before.
Fund-based exposure worth Rs 990 crore to Vodafone India now fully provided for. The bank does not expect bank guarantees to be invoked.
Management said the deposit scare and legacy corporate stress recognition are behind it, and the bank is ready for growth.
Large corporate credit growth was healthy in Q2 as the bank saw opportunities in non-banking financial company, education, road and textile sectors through short-term/working capital financing.
The resurgent IndusInd — with better liability profile, higher retail orientation, and proper risk guards — should deliver sustainably higher return ratios in the long run, making it a good turnaround story.