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Buy IndusInd Bank, target Rs 1,900: Deutsche Bank

The brokerage has set a one-year horizon for the stock to hit the target price.

Updated: Jul 02, 2019, 09.54 AM IST
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The private lender is targeting a 25 per cent loan growth, driven by both corporate and retail.
Deutsche Bank has given a buy recommendation on IndusInd Bank (IIB) with a target price of Rs 1,900.

Shares of IndusInd Bank traded at Rs 1,443.6 around 9:30 am on 2 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

As per the brokerage, the management of IIB is confident on asset quality with their exposures in sectors such as real estate, gems and jewellery performing well.

"It expects stress book of 1.9 per cent should gradually decline and maintains its credit costs guidance of nearly 60bps. With merger now complete, it remains upbeat on its rural penetration and expects liability franchise to gradually get better. We expect bank to deliver nearly 2 per cent return on assets (RoA), nearly 20 per cent RoE by FY21," said the brokerage.

The stock trades at 2.2 times FY21E PBR.

Investment rationale by Deutsche Bank:

Asset quality
With IL&FS recognition, now behind, the management expects asset quality trends to return back to normalised levels. It has reported a watch-list of nearly 1.9 per cent, which is likely to gradually decline.

IIB has reasonable collateral on this book, with value increasing. Its PCR has fallen to 43 per cent, but will look to increase it to 60 per cent. On a standalone basis, it maintains its credit cost guidance at nearly 60-65bps. "We expect FY20E/21E credit cost to be 120bps/110bps," said Deutsche Bank.

Real Estate
Its real estate exposure is nearly 4 per cent of loans and is spread across of 70-75 projects mostly in metros and tier I cities. No single exposure is more than Rs 150 crore. IIB is a late stage financier for projects which are near completion and does not do land bank financing. It reports the overall SMA 2 book at 0.34 per cent, which includes its real estate exposure.

Its LRD book is all generating regular cash flow, with most the book being to rated corporate. Commercial is very strong and performing in LRD, however there is some weakness in retail.

Gems and Jewellery
Its gems and jewellery exposure is nearly 4 per cent of loans, and is all performing with Zero NPAs or even SMA-2. IIB has a vintage in this segment and has processes in place to monitor right from the origination to the end user of the product. The book is not growing, but it is an excellent return on equity (RoE) product.

As per the brokerage, IIB will announce the successor for Romesh Sobti, whose term ends in March 2020, most likely in Q2FY20. Succession planning has been discussed by the board for some time and is also audited by RBI. The probability of an internal candidate is high.

The private lender is targeting a 25 per cent loan growth, driven by both corporate and retail. It expects vehicle finance book to grow at mid 20s, while non vehicle book is expected to grow higher by over 25 per cent. On CVs, while the overall growth remains slow, IIB has been gaining share as NBFCs have withdrawn in this segment to some extent.

IIB has a large fixed rate book and hence should benefit as rates come off in the system. "We expect steady margins in the first half on a standalone basis, with pick up in the second half," Deutsche Bank said. However, with merger now complete, synergies will flow through which should result in 25-30 bps NIM improvement.

Deutsche Bank believes that on a merged basis, a lot more synergies will now accrue on liquidity, NIMs, risk weighted assets, and priority sector loans – thereby lifting the earnings potential of the franchise.

On liabilities
It will look to tap more of Bharat Financial's customers through the Kirana stores. It is already running pilots and execution will be the key. The merger will also help do more pilots with state governments as they look for a bank which has distribution and lends to businesses in their respective states, apart from rates.

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