IndusInd Bank Q1 results underscore its premium valuation

IndusInd Bank Ltd didn’t spring any surprises in its first quarter, nasty or otherwise. After a less flattering fourth quarter, where the private sector lender reported a surge in slippages, the bank is back to its historically impeccable asset quality. Its bad loan ratios were steady and slippages were ₹ 475 crore, half of that from a year ago. Its gross and net bad loan ratios at 1.15% and 0.51%, respectively, should confirm the consistent performer label that investors have given it.

Indeed, IndusInd Bank shares is priced to perfection at 4.2 times its estimated FY19 book value and analysts attribute the premium to mainly its asset quality even as it continues to grow in double digits.

The fact that IndusInd Bank’s corporate loan book grew at an impressive 30% should be a sign that loan growth is finally coming out of the woods.

This portends a much-awaited recovery phase for other banks as well and most are likely to report a quickening of their loan growth.

For IndusInd Bank, its traditional loan growth driver—commercial vehicle loans— has held up, growing at 14%. Overall vehicle finance book grew at a healthy 28%.

Considering the strong loan book expansion, the lender’s core income also grew at a robust pace of 20%. All this helped IndusInd Bank report a net profit that was in line with Street estimates.

So, why did the stock fall marginally after the results were announced?

The dampening effect on an otherwise strong earnings was the narrowing of the net interest margin. The bank’s margins narrowed to 3.9% from 4% a year ago. Margins are likely to remain under pressure for this year given that funding costs may increase due to tightening liquidity for banks.

Further, pristine bad loan ratios are not just a function of lower slippages but also of a strong loan growth. Another metric of asset quality is the extent of insurance through provisions a lender makes. IndusInd Bank’s provisions grew 13% to ₹ 350 crore.

IndusInd Bank Q1 results underscore its premium valuation

The loan growth itself got a leg-up due to the acquisition of microfinance company Bharat Financial Inclusion Ltd that took effect in January this year.

While the lender’s first quarter show underscores its premium valuation, for the road ahead, IndusInd Bank investors would look for not just the expected consistency but more vigour in terms of growth.

source: livemint


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