IndusInd Bank Share price - BUY: Takeaway From Jefferies Investor Call, Book Quality Holds-Up; Provisions To Catch-Up

Jefferies maintains Buy rating on IndusInd Bank, raising their target price to Rs 1030 from Rs 800 earlier. Jefferies hosted SV Parthasarthy (Head, Consumer Finance) & Sanjay Mallik (Head Strategy & IR) for investor calls where they highlighted that the bank's restructured book may be near low single digit % of loans. Provisioning may be elevated in the second half FY21 as the bank covers for downgrades & some buffer-provisions. Lower concentration, on assets & liabilities, are key medium-term targets. Warrants are due for conversion on Jan-21 at Rs 1709/sh that can add 5% to capital.

Collections holding-up, but provisioning will normalise after second half of FY21:

IndusInd Bank's loan collection levels have continued to be healthy (95-96%) and management continues to guide for low single-digit restructuring on overall loans. Management believes legacy corporate stressed exposures (pre-covid) have largely been dealt with and provided for, and incremental corporate exposures are of good quality. Unsecured exposures in retail (MFI and credit cards) which are under stress will be dealt upfront through downgrade/ provisioning, and restructuring in the retail segment largely relates to pockets which have been severely affected (passenger buses, hospitality etc). Management expects credit costs to remain elevated through 2HFY21 as it will continue to provide for stress preemptively, while this should normalise towards FY22.

Effort to granularise both sides of balance sheet:

Management continues to work towards granularising both IndusInd Bank's deposit and asset franchises. On the corporate loan front, management has been engaged on reducing chunky exposures - this will have an impact on fees (especially corp. banking and IB fees). Simultaneously, management is working towards increasing the share of retail deposits (33% of deposits currently). IIB is still offering pre-Covid levels of interest rates on retail term deposits even as larger peers have cut them by 80-130bps. Initiatives on the retail deposit side and unwind of corporate deposits (CDs down to one-third of pre-Covid level) will help bring down concentration and costs.

IWG report permits promoters to raise stake; warrant conversion will address doubts:

The IWG report recommends a uniform cap of 26% for bank promoters, IndusInd Bank promoters hold 13.5% stake in the bank (14.7% ex-GDR in base). Promoters also hold 15.8 mn warrants (2% of existing shares), which will lapse on Jan-21. These warrants convert at Rs 1,709/sh and 25% has already been paid upfront in July-19. If promoters convert these warrants into shares, it will not only lift net worth by Rs20bn or 5%, but will also address doubts.

Raise earnings estimates and target price; Buy stays:

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Jefferies raise their earnings forecasts for FY22-23 by 3-5% factoring lower credit costs and better topline. Valuations are still at discount to past average and hence improvement in growth/ quality outlook can drive rerating. Jefferies also raised their target price to Rs 1030 based on 1.8x Sep-22 adjusted PB (from Rs 800 earlier that was based on 1.4x adjusted PB). Buy rating stays.