Stock Review: IndusInd Bank

 

Private sector lender IndusInd Bank started the year by reporting impressive profits, primarily driven by strong loan growth, healthy low cost deposit (CASA) accretion and robust fee income.

However, there is growing pressure on net interest margin, or NIM, and also on asset quality. The sequential decline in NIM continued for the second consecutive quarter. NPL ratios were up marginally, in select segments of the consumer finance division. The bank strategically increased its focus on non-core interest income in the backdrop of rising interest rates which was reflected in the bank's profit after tax growing 52%. Core fee income grew 34% year-on-year and 19% sequentially due to robust fee income.

Third-party distribution income, alone contributed 63.2% to non-interest income. IndusInd Bank's fee income as a proportion of NII is the highest in the industry.

Despite the rising cost of funds, net interest income (NII) grew strongly at 31.9% YoY. However, on a sequential basis, the net interest margins of the bank fell by 10 bps. The impact of rising cost of funds on net interest margins (NIM) got negated to some extent by 4.35% increase in credit-deposit ratio and steady improvement in CASA ratio by 3.9% YoY basis, at 28.2%.

Driven by growth in commercial vehicle loans, the bank's advances grew 32%, stronger than the industry's growth rate of 17%. Further, the bank also improved its loan mix by tilting more towards higher yielding retail assets, which was due to IndusInd Bank acquiring the credit card business from Deutsche Bank recently.

An area of concern for the bank is its asset quality which deteriorated during the quarter. Gross net performing asset increased by 16% sequentially, mainly due to the credit card business acquired by the bank this quarter.

Fresh slippages stood at . 73 crore during the quarter implying a slippage ratio of 1% of advances. The slippages were mainly in the utility vehicle and construction equipment segments.

At current price, the IndusInd stock is available at a staggering P/E multiple of 23 compared to P/E range of 13-15 of its peers. However, the slowdown in the commercial vehicle market sector, in which IndusInd bank has considerable exposure can impact its valuations in near term.