IndusInd Bank: A consistent performer

Emphasis on retail segments and efficient capital allocation to drive profitability

Strong show on loan growth, fee income, margins and asset quality outlined IndusInd Bank's results for the June quarter. Net profit grew 24.7 per cent year-on-year (y-o-y) to Rs 525 crore, and was higher than the Bloomberg consensus estimate of Rs 515 crore.

Even excluding treasury gains, operating profit was up 21 per cent. The ability to identify potential segments has enabled it to consistently post strong growth. Its net profit has grown by 25- plus per cent over the past nine quarters. The net interest margin, has remained in a narrow but robust band of 3.6 per cent to 3.8 per cent, while its gross non-performing assets ratio was between 0.8 per cent and 1.1 per cent.

Recovery in the commercial vehicle (CV) book, continued traction in corporate loans and a stable margin were key enablers. The marginal increase in provisions rubbed off favourably on the bank's bottom line. Healthy recovery of 18.3 per cent y-o-y in CV segment (16 per cent of loan book) drove the consumer finance book. Overall, loan book grew 23 per cent on the back of 27 per cent growth in corporate loans.

The bank is confident of maintaining a loan growth of 20 per cent. To drive profitability, it is chasing various growth avenues. It is focusing on growing its retail book faster, as this segment has lower risk-weighted assets (RWA). The Reserve Bank of India has allowed some relief for retail loans meeting certain criteria (self-employed, small business loans not exceeding Rs 5 crore).

Such loans can carry an RWA of only 75 per cent versus 100 per cent for most other segments. This means, even though the bank is growing, it will ensure better capital allocation and profitability. The bank aims to take the retail book to 48 per cent of total loans versus 42 per cent currently.

Second, the bank is confident of maintaining the margins even in a falling interest rate cycle, on the back of levers such as a fixed-rate vehicle finance book (25 per cent of loan book), improvement in Casa, or current and savings accounts, and loan book rebalancing. Focus on low-cost self-employed deposits rather than salaried-class deposits is another area which it believes will aid profitability.

IndusInd Bank recently acquired the gems & jewellery portfolio of RBS, which will be incorporated in its books from July-end. It believes this segment will be accretive to key return ratios and margins.

The scrip rallied 3.3 per cent after the results announcement on Monday. The stock at Rs 924 appears fairly valued.