Stock Review: IndusInd Bank

 

IndusInd Bank, which was considered a laggard a few years ago, is now in the top league in terms of efficiency and financial strength. The bank's focus on a retail mix with a concentration in vehicle loans had muted its growth. However, the new management has carried out a revamp and in the process laid a strong platform to scale up its business.

BUSINESS

IndusInd Bank is one of the new generation private sector banks in the country. The bank has two main segments in its loan portfolio — corporate and commercial banking (including the SME segment) and consumer finance. The bank's retail mix is significantly different from its peers, with a negligible presence in home loans and focus on commercial vehicle loans, equipment and automobile financing. The consumer finance business is a high yielding one with yields as high as 20%.

   Back in 2008, IndusInd was battling a host of issues, such as poor asset quality, less visibility in the industry and poor quality of earnings. A new management team led by Romesh Sobti took charge of and made a huge impact in the first 3 years by revamping the bank.

   Its loan growth has stayed above that of the industry during the past eight quarters. Advances grew by a CAGR of 29%, while deposits grew at a CAGR of 25% during the same period. The bank has been focusing on boosting its current and savings account ratio, or CASA, to improve its margins. To achieve this, the bank plans to increase its branches to 550 from 300 by FY13. In the past three years, the bank has improved its CASA from 15.7% to 27.2% in FY11.

   The bank has managed to improve its NIM from 2.1% in FY09 to 3.5% in FY11. In the quarter, the NIM compressed by 11 bps due to a rise in cost of funds. Its return on asset (ROA) has improved from below 1% to more than 1.5% in two years, while most Indian banks posted an average ROA of 1%. This shows that currently it ranks high in terms of utilisation of assets. The bank has done well on quality of assets as well, as net non-performing assets (NPA) formed just 0.4% of net advances at end FY11.

   One major concern for the bank going forward could be the higher operating costs due to branch expansion. Considering that the bank is planning to grow its consumer finance business, it will have to be mindful of the fact that commercial vehicle business, which forms 49% of its portfolio, is highly cyclical in nature. Thus, any downturn in the industry may hamper its growth in the consumer finance business.

VALUATIONS

The stock is trading at 3 times its book value, which is high considering its history. However, given its robust growth and expansion plans the premium valuation is justified.