fairwealth institutional research indusind bank...

Fairwealth Institutional Research

IndusInd Bank- Initiating Coverage

Fairwealth Securities Ltd March 29, 2012 1

Banks April 02, 2012

Rating: Buy; CMP: Rs 325; Target: Rs 387; Upside: 19%

Price Performance % 1M 3M 6M 12M Absolute 8 24 12 64 Rel to Sensex 9 16 8 67

1 Year Price Performance

Preeti Gupta Sr. Research Analyst [email protected] 022 39244306

Basic Info Bloomberg Code IIB IN Market Cap (Rs cr) 13884 Face Value (Rs) 10 Book Value (Rs) 86.7 EPS (Rs) 12.4 Dividend Yield 0.67% 52 week H/L (Rs) 333.9/221.8 Avg Monthly Vol (NSE+BSE) 222 lakhs Listed At BSE,NSE Equity capital (Rs cr) 467.51

Share Holding Pattern (%) (31st Dec 2011) Promoter 19.5 FII 34.72 DII 7.7 Others 38.08 Total 100.00

Commendable turnaround during FY08-11 by Mr Sobti and his team has delivered impressive results on most operating metrics of the business reflecting in rising RoA, RoE, NIMs, profitability etc. After witnessing a remarkable growth in Phase 1, we believe that the base is set for the bank to capitalize on next round of growth. For the planning cycle II, bank will target scalability with maintaining profitability by increased focus on low cost liability franchise, branch expansion, non-interest income etc. We expect CD ratio in the range of 75-80%, for that deposits to be put to efficient use. Further, fee growth is expected to exceed the loan growth in coming years led by increased focus on fee enhancers.

Strong loan growth to continue: We expect loan growth of IIB to pick up in FY13 on the back of expected reversal of interest rate cycle. However, bank’s aspiration to maintain profitability, margins and RoA may lead to a moderated credit growth in FY13 and FY14. We expect loan book to grow at a 26% CAGR during FY2012-2014.

CFD book expected to reach at ~ Rs. 25000cr by FY14: The bank does not have any plan as of now to restructure the home loan share in CFD portfolio. However, it would continue to originate and distribute more home loans (HDFC Bank loan product), and thereby earn fee income. Overall, the bank targets to grow its consumer loan book to Rs 25000cr by FY2014 from Rs 15695cr as on 3QFY12.

Liability Franchise to improve: At present, the bank has a network of 365 branches as on 3QFY12. The bank expects to open 285 branches by FY2014 from present 365 branches. Going forward, we expect CASA to strengthen further to 33% by FY14, largely driven by SA deposits accrued from the various initiatives taken such as hike in saving rates, credit card, LAP, mortgages etc.

Asset Quality to remain strong, marginal pressure can not be ruled out: Progress in asset quality has been on account of continuous focus to lower credit risk and lower defaults in vehicle loans due to high replacement cost of vehicle. Another comforting factor for the control over asset quality is the lower exposure towards distressed sectors. Going forward, we believe that the bank is likely to witness a marginal increase in NPA on account of higher exposure to commercial vehicle. However, overall asset quality remains prudent and is anticipated to remain firm in the long run.

Valuation Well planned strategies to scale up the business, healthy growth in earnings, an improving liability franchise and sustained growth will provide further assistance to the premium valuations of IIB. The balance sheet is well capitalized with Tier-1 CAR of 10.7% as on Dec 2011. RoA and RoE of IIB are one of the highest in the industry. We expect IIB to deliver an impressive 32% earnings CAGR during FY11-14E. The stock trades at 2.8x FY13E and 2.3x FY14E ABV. We initiate coverage on IIB with target price of Rs 387 (based on blended approach), implying potential upside of 19%.

Key Risk: (1) Cyclicality in CV Business (2) execution risk (3) any substantial deterioration in economic environment may hamper the growth strategies (4) Increasing focus on CFD may lead higher NPAs.

Year NII PAT ROE ROA ABVS P/ABV

(Rs. Cr) (Rs. Cr) (%) (%) (Rs.) (x) FY11 1377 577 17.8% 1% 87 3.8

FY12E 1900 841 18.6% 2% 102 3.3

FY13E 2474 1070 20.1% 2% 120 2.8

FY14E 2963 1316 20.9% 2% 143 2.3

60

80

100

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220

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Apr‐11

May‐11

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Nov

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Dec‐11

Jan‐12

Feb‐12

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IIB Sensex Bankex

Fairwealth Institutional Research IndusInd Bank- Initiating Coverage

Fairwealth Securities Ltd April 02, 2012 2

REMARKABLE TURNAROUND DURING FY2008-11…….

Last three year proved restructuring story with the joining of new management who addressed a whole host of issues inherited from the past. The challenge was to recapitalize, re-talent and re-organize the bank structure and also restructure the balance sheet. IndusInd Bank has witnessed commendable performance in last three years. By the end of Planning Cycle I, RoA and RoE improved to 1.4% 17.8% in FY2011 from mere 0.3% and 6% in FY2008 respectively. NIMs (after provisions) reached to 2.7% in FY2011 from only 1% in FY2008. Quality of the bank’s assets improved with NPAs falling to 0.28% as on FY11 from 2.27% in FY08. Bottom-line of the bank grew at a CAGR (FY08-11) of 97%. For the Planning Cycle II, we expect the bottom-line growth of IIB at 37% CAGR (FY11-14). The transformation period of IIB can be summarized by the changes seen since FY08- New execution-focused management brought noteworthy changes in performance Till FY08, IIB witnessed poor performance on profitability due to lower leverage of its branch network and weak loan growth. The branches were inadequately leveraged to boost low-cost deposits and distribution of third-party products. Lack of diversification in the loan book kept it volatile as earlier IIB was only a vehicle financer. However, with the joining of new management, remarkable turnaround was brought and the bank exceeded the targets set for NIM, RoA, RoE, NPAs for FY11. Q4FY11 marks the end of 12 quarters of planning cycle I set by the management: a) RoA improved from 0.58 % in FY09 to 1.4% in FY11; b) NIM exceeded the target of 3%, touching 3.5% in FY11; and c) Net NPA came down to below 1% (at 0.3%) in FY11. We believe with the bricks now in place, the bank should be able to build on this and achieve RoA and RoE of 1.60% and ~20%, respectively, by FY13E.

Exhibit 1: Key Management Personnel

Management Team Designation Previous Assignments

Romesh Sobti Managing Director & CEO

* Executive Vice President ¡VCountry Executive, India and Head, UAE & Sub-continent at ABN AMRO bank N.V. * Has been associated with ANZ Grindlays Bank plc & State Bank of India in his 33 year career

Paul Abraham Chief Operating Officer * MD of ABN AMRO Central Enterprise Services

* COO of ABN AMRO Bank in India

Sumant Kathpalia Head -Consumer Banking * Head -Consumer Banking, ABN AMRO Bank India

Suhail Chander Head -Corporate & Commercial Banking * Head -Consumer & Commercial Banking, ABN AMRO Malaysia & Singapore

KS Sridhar Chief Risk Officer * Senior Vice President and Country Risk Officer, ABN AMRO India

Ramesh Ganesan Head -Transaction Banking * Executive Director, ABN AMRO India



Business segments reorganized; moved up the value chain from a vehicle financer IIB reorganized its business into client based units and product groups that work across client groups with the objective to enhance focus and customer orientation and service levels. As a part of business restructuring, the management broadened the horizon of bank from a mere vehicle financer to a full diversified services provider. Bank also restructured geographical structure, regional offices and branch structure. Geographical restructuring was done by standardization of zones and setting up of common regional offices for all business centres.

Exhibit 3: Restructuring of Business Segments

Exhibit 2: Performance crossed the set targets for Phase I

Parameters Phase -1

FY07 FY08 FY11 FY11 guidance RoA 0.35% 0.33% 1.41% >1% RoE 7% 6% 18% >18% NIM 1.52% 1.46% 3.56% 3% NPAs 2.47% 2.27% 0.28% <1% Cost to Income Ratio 66.7% 67.2% 47.7% 50% Revenue per Employee 2 mn 2.1 mn 3 mn 3.3 mn

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Thrust on driving revenue from fee income The bank emphasized on fee income base and its contribution to the bottom-line. For the purpose, bank introduced dedicated product portfolio to provide cash management, trade and financing, supply chain financing, global remittances, commodity financing, and electronic banking services to clients across business groups. Thrust on cross selling to existing client base, realignment of pricing on its basic products such as demand drafts and lockers and increased focus on building momentum in the third party sales of insurance and mutual funds etc witnessed considerable acceleration in fee income.

Exhibit 7: Core Fee Income (Rs cr) Exhibit 8: Diversified Core fee Income

Source: Company, Fairwealth Research Source: Company, Fairwealth Research

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Exhibit 13: Planning Cycle II

Parameters Phase –II

FY08-11 IIB’ Aspiration as on Q3FY12 We expect….

Loan Growth 27% CAGR 25-30% p.a. 30%

3 years average growth of 26%. Guidance possible but any kind of

systematic risk in the economy can not be ignored.

CFD Book 16% CAGR to reach at ~ Rs 25000cr by FY14, funded through

CASA

CFD book Rs.15,695crs, Growth

48%

Possible due to the structural shift in the industry.

CASA Growth

25% in FY11 from 16% in FY08 >35% by FY14 27%

Targets too high to achieve. We expect CASA to reach at ~33% by FY14. growth likely to led by CA

CD Ratio at 76% in FY11 from 67% in FY08 75%-80% 80% Largely dependent on CASA move.

We expect ~78% by FY14.

Fee Growth 57% CAGR fee growth to exceed loan growth 46%

Further scope to spread fee income is there. Execution strategies to

increase core fee income remain a key.

Source: Company, Fairwealth Research

...…SET THE BANK FOR NEXT GROWTH ORBIT

After achieving the set target for Planning Cycle I successfully, IIB moved further with aggressive plans and targets for second phase. With the improved performance parameters and consistent growth of business, strategy for the next phase is ‘Scale with Profitability’. Guidance for FY11-14 remains aggressive like the previous phase of planning cycle. As a part of the Phase 2 strategy (spanning over FY11-14), management expects bank’s loan book to grow at 25-30%. Consumer finance division is likely to reach at Rs 25000cr, entirely funded by CASA. Hence, to ramp up CASA, bank plans to leverage its branch network with expected 350 new branches in the period of FY11-14. We expect CASA to reach at ~33% of total deposits by FY14 from present levels of 27%. Management expects CD ratio in the range of 75-80%, for that deposits to be put to efficient use. Further, fee growth is expected to exceed the loan growth in coming years led by increased focus on fee enhancers.

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Exhibit 14: IIB

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Exhibit 19: Loan Mix of CFD FY08 FY09 FY10 FY11 3QFY12

Consumer Finance Division 56.4% 45.3% 40.4% 44.4% 48.4% Comm. Vehicle Loans 33.4% 26.3% 19.5% 21.8% 23.0% Utility Vehicle Loans 2.5% 2.7% 3.4% 3.2% 3.5% Three Wheeler Loans 0.0% 0.0% 4.5% 5.4% 5.7% Two Wheeler Loans 6.1% 5.4% 4.4% 4.3% 4.4% Car Loans 4.6% 3.2% 2.3% 3.2% 3.8% Equipment Financing 8.1% 6.3% 5.5% 5.7% 6.1% Credit Card 0.0% 0.0% 0.0% 0.0% 0.7% Other (Home, LAP) 1.7% 1.3% 0.8% 0.9% 1.3%

……CFD book expected to reach at ~Rs. 25000cr by FY14

The Consumer Finance Division extends asset-backed financing for a wide range of vehicles, spanning across heavy commercial vehicles, cars, three wheelers, two wheelers etc. Besides, specialty construction equipments like tippers, cranes, excavators and loaders are also financed. The thrust is more towards small commercial vehicles i.e. three-wheeler and entry level four-wheelers, as this product line yields high return. The division also contributes to core fee income primarily through distribution of third party products.

In the past, as a part of restructuring strategy, IIB reduced the contribution of CFD division to 44% in FY11 from 58% in FY07. The same traction is clearly visible in the commercial vehicle loan which came down to 21.8% from 33.4% in FY08 of the total loan portfolio. After taking over Ashok Leyland Finance, IIB secured access to its strong infrastructure and wide distribution network. Other than 300 branches of the bank, IIB utilises the distribution network of its associate company IndusInd Marketing and Financial Services, which handles vehicle finance and operates a network of 700+ marketing outlets. This distribution network gives IIB a distinct competitive edge in the CV segment.

Unlike its peers, IIB has negligible presence in home loan and personal loan products. The proportion of home loan (including few others products) in retail portfolio is only 1.3% compared to its peer group (e.g. 7% for HDFC Bank).

Going forward, IIB intends to increase the share of CFD in total loan portfolio to 50% by FY12 from the current 48.4%. It does not have any plan as of now to restructure the home loan share in CFD portfolio. However, they would continue to originate and distribute more home loans (HDFC Bank loan product), and thereby earn fee income. Overall, the bank targets to grow its consumer loan book to Rs 25000cr by FY2014 from Rs 15695cr as on 3QFY12.

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Exhibit 20: Ag

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170

180

10 0

2008 200

chise to impro

significantly ito 27% in FY

CASA as on Fved its strategresent, the bao open 285 neo reach at 33%

nsion on spre

le I (FY08-FYas the bank focdded only 130 ere added in FYned approxima-11, far ahead

on plans and haategy of cluste

2, the bank htotal number oconcentrate onn and deposit tbenefit from e

180

180

0 30

09 2010Branches

ve

mproved its lY11, primarilyFY11. After a gy to expand tank has a netew branches b% of total dep

ee….

Y11), expansioncused on impronew branches

Y11. Consideriately 821, 130d of IIB’s expaas planned to aer approach an

had 365 brancof branches ton the northern aticket sizes are

expansion of br

210

90

2011

liability franchy led by curre

lull in brancthe branch network of 365 by FY14 fromposits by FY14

n of branches oving productiduring FY08-

ing its peer gro2 and 174 ne

ansion. From Fadd overall 350nd concentrates

ches and plano 650 odd. IIBand western gee relatively onranch network

300 40

0

100

125

2012E 2013Growth %

hise by increaent account whch expansion detwork and adbranches as

m the present 34.

remained mutivity and profit11, of which moup, Axis bankew branches rFY11 onwards0 branches in ps on fewer citi

s to strengtheB’s strategy ineographies in t

n higher side. Gand increased

525

125

3E 2014E% (RHS)

asing CASA frhich accountsduring FY08 dded 90 brancon 3QFY12.

365 branches.

ed as comparetability of exis

major part (appk, HDFC Bankespectively in, IIB scaled uplanning cycle Iies to increase

en its networkn terms of bratop 20 cities wGoing forwardvisibility.

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

12

from s for and ches The We

ed to sting prox. k and n the p its II. It

e the

k by anch here , we



Exhibit 21: Branch Network - Peer Group

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Axis Bank

Num

ber

of

Bra

nche

s 182 252 339 450 561 571 835 1035 1382 HDFC Bank 231 312 467 535 684 761 1412 1725 1986 Yes Bank 0 0 0 7 40 67 117 150 214 IndusInd Bank 53 61 115 137 170 180 180 210 300 Axis Bank

Bra

nch

Net

wor

k G

row

th 38% 35% 33% 25% 2% 46% 24% 34%

HDFC Bank 35% 50% 15% 28% 11% 86% 22% 15% Yes Bank - - - 471% 68% 75% 28% 43% IndusInd Bank 15% 89% 19% 24% 6% 0% 17% 43% Axis Bank

bran

ches

op

ened

70 87 111 111 10 264 200 347 HDFC Bank 81 155 68 149 77 651 313 261 Yes Bank 0 0 7 33 27 50 33 64 IndusInd Bank 8 54 22 33 10 0 30 90 Source: Company, Fairwealth Research

Exhibit 22: Branch Network as on Dec, 2011


Currently, the bank has a strong network of 365 branches and 674 ATMs, with a pan India presence in 28 states and union territories. However, going forward it intends to add 100 new branches by FY12e, and 650 branches and 1,800 ATMs by FY14E. Majority of the expansion is likely to be concentrated in top 20 cities with focus on Northern and Western India.

Fairw IndusIn

Fairwealth

Exhi

1000

2000

3000

4000

5000

6000

7000

8000

Exhi

1

FY

Exh

Axis

HDF

ICIC

Kota

Indu

Yes B

Sourc

wealth In

nd Bank- In

Securities Ltd

ibit 23: Deposi

0

00

00

00

00

00

00

00

00

FY05 FY06 FYD

ibit 25: CASA

1%13%

15%

Y05 FY06 FY07

hibit 27: CASA

Bank

FC Bank

CI Bank

k Mahindra Bank

usInd Bank

Bank

ce: Company, Fair

nstitution

nitiating Cov

d April 02

its growth

Y07 FY08 FY09 Feposits (Rs cr)

A % of total de

16%

19%

FY08 FY09

A Growth % -

FY

10

73

10

52

19

rwealth Research

nal Resea

verage

, 2012

…OonetgrinCexfret

FY10 FY11 FY12E F% grow

eposits

24%

27% 28%

FY10 FY11 FY12

- Peer Group

Y04 FY05

04% 51%

3% 33%

09% 55%

53% -80%

9% 12%

- -

arch

….to drive CAOn the liability

n the expandedtc. Consequentrowth in deponcrease the CA

CASA deposits xpect CASA torom the varioustc.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Y13E FY14Ewth

%30%

33%

2E FY13E FY14E

FY06

33%

40%

55%

133%

38%

3325%

ASA growth side, IIB focu

d branch netwotly, IIB clockeosits was driv

ASA share steafor IIB record

o strengthen fus initiatives tak

Exhi

%

%

%

%

%

%

500

1000

1500

2000

2500

Exh

64%

36%

FY0

FY07 FY

46% 7

27% 3

34% 2

140% 5

36% 14

52% 13

used on improvork, improved ed 22% CAGRven by the stradily to 27.5% ded 46% CAGRurther to 33% bken such as hik

ibit 24: CASA

0

00

00

00

00

00

FY05 FY06 FYCA

ibit 26: Comp

% 62% 65%

% 38% 35%

05 FY06 FY07SA %

Y08 FY09

1% 27%

9% 15%

7% -2%

6% 10%

4% 42%

38% 25%

vement in depomarketing set

R growth in derategies adopte

of total deposR growth durin

by FY14, largelke in saving ra

A

07 FY08 FY09 FY10ASA (Rs cr)

position of CA

60%69% 7

40%31% 3

FY08 FY09 FY% of CASA

FY10

30%

37%

34%

46%

49%

100%

osit franchise tup, offering ineposits during ed by the newsits in FY11 frng FY08-11. Gly driven by SAates, credit card

0 FY11 FY12EFY13E% growth

ASA Deposits

70% 67% 63%

30% 33% 37%

Y10 FY11 FY12ECA % of CASA

FY11 CA

18%

26%

21%

18%

48%

69%

through leveragnnovative prod

FY08-11. Row managemenrom 16% in FYGoing forwardA deposits accrd, LAP, mortga

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

FY14E

61% 61%

39% 39%

E FY13E FY14E

AGR growth overFY08-11

24.78%

26.02%

16.81%

23.47%

46.16%

61.46%

14

ging ducts obust nt to Y08.

d, we rued ages

r

Fairw IndusIn

Fairwealth

Exh

Sou

A

wealth In

nd Bank- In

Securities Ltd

hibit 28: Curr

urce: Company

0.

ICICI bank

Indusind Bank

SBI

PNB

Allahabad Bank

Yes Bank

Axis Bank

Canara Bank

BoB

Corp Bank

Federal Bank

nstitution

nitiating Cov

d April 02

rent Account p

y, Fairwealth R

0 5.0 10

CA per

nal Resea

verage

, 2012

MImCexpainamacanW SASawcogrredeSA70inba

per Branch as

Research

.0 15.0 20.

branch

arch

Momentum in mprovement in

CAGR as compxisting customace than savingn 3QFY12 as mong the higheccount deposit nd exchanges,

We expect CA t

A likely to driaving accounts

wise also, IIB hontribution of Srowth in SA celationship leadeposits to rise A mobilization0,000 - 80,000nitiatives to ramank deregulatio

on FY11 (Rs

.0 25.0 30.

CA likely to cn CASA was lapared to 37%

mers and improg accounts. Procompared to 1est in the indufranchise furthcash managem

to reach at 20%

ive CASA gros had not grow

has one of the lSA to total depcan be attribuding to lower due to its aggr

n. IIB is aiming0 by 2012-13 mp up the SAon. We expect

cr) Exh

Sou

.0

A

continue argely driven b CAGR grow

oved branch poportion of cur10% in FY07.stry. Going forher by buildingment relations

% of the total de

wth… wn in line withlowest productposits has impruted to IIB’s h

cost of deposiressive branch g to increase itthrough savin

A, IIB has increSA to reach at

hibit 29: Savin

urce: Company

0.

ICICI bank

Indusind Bank

SBI

PNB

Allahabad Bank

Yes Bank

Axis Bank

Canara Bank

BoB

Corp Bank

Federal Bank

by current accowth during FY

roductivity suprrent deposit to. Also, currentrward, the bang relationshipsships and suppeposits by the

h the pace of ctivity as comparoved to 9% in higher focus oits. Going forwexpansion stra

ts customer acqngs account moeased its savint 13% of the to

ng Account pe

y, Fairwealth R

.0 5.0 10.0

SA per b

ount deposits w08-12. Strong pported CA to

o overall depost account prod

nk plans to stres with large andply-chain manaend of FY14.

current accounared to its peeFY11 from 5%

on large clientward, we expeategy which haquisition from obilizations. Ang rates to 5.5%otal deposits by

er Branch as o

Research

15.0 20.0 25

branch

which grew at 5relationship w

o grow at a fait has risen to ductivity of IIBengthen its currd small compaagement produ

nts of IIB. Indur group. Howe

% in FY07. Slots current acco

ect share of savas direct impac55,000 a mont

Among the var%-6% post sav

y the end of FY

on FY11 (Rs c

5.0 30.0 35.0

15

52% with aster 17% B is rent-anies ucts.

ustry ever, ower ount ving ct on th to rious ving

Y14.

cr)

Fairw IndusIn

Fairwealth

Exhib

Sourc

11

wealth In

nd Bank- In

Securities Ltd

bit 30: Yield M

ce: Company,

1.76%

13.23%

7.84% 8.2

FY08 FY09Yie

E

S

nstitution

nitiating Cov

d April 02

Movement %

Fairwealth R

%12.60%

22%

6.82%

9 FY11eld on Advances

Exhibit 32: Sh

Source: Comp

12% 11

88% 89

2003 20

nal Resea

verage

, 2012

St

II19loplImona deyiba

Research

13.52% 13.81

7.71% 8

Q1FY12 Q2FCost of

hare of CASA

pany, Fairwea

1% 11%

9% 89%

004 2005

arch

trategic shift i

IB had not exp998 to 2010). ower levels (1.lanning cycle-mprovement inn high yieldingmeager 20 bp

ecline in cost oielding sectorsank to sustain i

1% 13.79%

8.16% 8.16%

FY12 Q3FY12Deposits

in Overall Fu

alth Research

13% 15%

87% 85%

2006 2007

Term

in loan portfo

erienced healthThe situation w5% to 2.1%).

-I i.e. FY2011n last three yeag products suchps. On the liabof deposit by 1s (Used CV loaits margin in fu

Exh

So

0

0

1

1

2

2

3

3

4

4

nding

16% 19%

84% 81%

2008 2009

m Deposits

lio to support

hy NIM in the worsened durinSince FY2010 witnessed thrs can be attribh as used CV lbility front, hi165 bps. A highans, credit caruture. We expe

hibit 31: NIM M

ource: Compa

0.0%

0.5%

.0%

.5%

.0%

.5%

.0%

.5%

4.0%

4.5%

1998

1999

2000

% 24% 2

% 76% 7

9 2010 20

Margins

past and hoveng FY06-09 w

0, NIMs startede highest NIMbuted to the chloans, while theigher proportioher CASA rati

rds and loans aect NIM to be a

Movement %

any, Fairweal

2001

2002

2003

2004

27% 28%

73% 72%

011 2012E

CASA Ratio

red in the rangwhen NIMs toud improving an

M in the histohange in asset le yield on advaon of CASA dio and greater eagainst propertat ~3.9% for FY

lth Research

2005

2006

2007

2008

2009

30% 33%

70% 67%

2013E 2014E

ge of 1.5-3% (fuched its histornd the year-en

ory of IIB (3.6liability mix, foances increaseddeposit resulteexposure to higty) would helpY14E.

2009

2010

2011

2012E

2013E

16

from rical

nd of 6%). focus d by

ed in gher

p the

2014E



Exhibit 35: Risk adjusted yield of various segments in vehicle loans

Segment (%) Yields on loans Average yield (%) Credit cost (%) Risk adjusted

yields (%)

Consumer Finance Division Commercial vehicle loans 13.0-15.0 14 0.77 13.2

Construction equipment 12.5-15.0 13.8 0.88 12.9

Utility vehicle loans 13.0-15.0 14 0.34 13.7

Loan against property 13.0-15.0 14 NA NA

Car loans 12.5-14.0 13.3 1.39 11.9

2/3 wheeler loans 18.0-23.0 20.5 1.29 19.2


Exhibit 33: Restructuring of Loan portfolio to boost yield - C&CB


28.5% 26.1% 30.3% 29.0% 28.1%

22.2%19.3% 15.3% 15.0% 14.7%

8.9%10.1% 9.7% 9.3% 8.8%

FY10 FY11 Q1FY12 Q2FY12 Q2FY12

Loan to Small Businesses Commercial Banking C&I

Exhibit 34: Restructuring of Loan portfolio to boost yield - CFD


19.5% 21.8% 21.7% 22.4% 23.0%

3.4% 3.2%3.2% 3.4% 3.5%4.5%

5.4% 5.3% 5.6% 5.7%4.4%4.3% 4.2% 4.3% 4.4%2.3%3.2% 3.3% 3.6% 3.8%5.5%5.7% 5.6% 5.7% 6.1%

0.0%0.0% 0.8% 0.8% 0.7%

0.8%0.9% 0.5% 1.0% 1.3%

FY10 FY11 Q1FY12 Q2FY12 Q2FY12

Other (Home, LAP) Credit Card Equipment FinancingCar Loans Two Wheeler Loans Three Wheeler LoansUtility Vehicle Loans Comm. Vehicle Loans

During FY08-10, low yielding corporate loan increased from 43.6% in FY08 to 55.6% in FY11. Despite, margins were maintained due to the tight liquidity in the system and introduction of differential risk-based pricing for each customer segment. IIB re-shifted its focus from corporate loans to consumer loans witnessing a continuous decline in the share of corporate loans from 59.6% in FY10 to 51.6% as on Q3FY12. Management intends to proportionate its overall loan book by 50%-50% between corporate and commercial banking and consumer finance division. Going forward, ramp up in CASA ratio and improved share of high yielding vehicle finance book to ~50% by FY14E will help margins to expand further.



Asset Quality remains strong, marginal pressure can not be ruled out

IIB’s domain expertise in vehicle financing business, better risk management practices and aggressive moves to clean the book led the terrific improvement in asset quality which has improved significantly during FY08 to FY11. Gross and net non-performing loans have come down to 1% and 0.3% respectively in FY11, one of the lowest in the banking sector. Slippages (0.7% in FY11 from 1.2% in FY08) and provision coverage ratio (from 26% in FY08 to 73% in FY11) also improved. Progress in asset quality has been on account of continuous focus to lower credit risk and lower defaults in vehicle loans due to high replacement cost of vehicle. Another comforting factor for the control over asset quality is the lower exposure towards distressed sectors. Going forward, we believe that the bank is likely to witness a marginal increase in NPA on account of higher exposure to commercial vehicle. However, overall asset quality remains prudent and is anticipated to remain firm in the long run.

Exhibit 38: NPA Movement in C&CB Exhibit 39: NPA Movement in CFD


0.9%

0.6%

0.8%

0.7% 0.7%0.8%

0.6%

0.7%0.6%

0.5%

0.0% 0.0% 0.0% 0.0% 0.0%0.1% 0.1% 0.1% 0.0% 0.0%

200909 200912 201003 201006 201009 201012 201103 201106 201109 201112

Gross NPAs % of advances Net NPAs % of advances

1.8% 1.7%

1.3%1.5% 1.4% 1.4% 1.3%

1.7%

1.4% 1.4%

1.2%

1.6%

1.2%

0.9% 0.9%0.8%

0.5% 0.5%0.6% 0.6%

200909 200912 201003 201006 201009 201012 201103 201106 201109 201112

Gross NPAs % of advances Net NPAs % of advances

Exhibit 36: NPAs Movement Exhibit 37: CFD division major contributor to GNPA


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014EGross NPA (%) Net NPA (%)

32% 26%40% 33% 33% 36% 31% 30% 31% 28%

68% 74%60% 67% 67% 64% 69% 70% 69% 72%

200909 200912 201003 201006 201009 201012 201103 201106 201109 201112

CFD C&CB



IIB has a well-diversified loan book with marginally exposed to distressed sectors such as Telecom, Power generation, commercial real estate, textile or gems and jewellery. Under telecom sector exposure towards sticky accounts like 2G/3G spectrum is nil. Exposure towards direct lending to micro finance institutions has also come down (constituting ~1% of advances). Restructured book for the bank continues to remain stable at 0.22% of outstanding loan book during Q3FY12, hence the potential risk stemming from restructured loan slippages is also very low.

Exhibit 42: Limited Exposure to stressed sectors


5.76

2.86

2.85

2.45

2.111.97

1.36

1.201.151.081.02

27.80

NBFCs (other than HFCs)PharmaTelecom ‐ Cellular/TowerLease Rental DiscountingConstructionPowerAuto AncillariesHosp. & Med. Serv.Gems and JewellerySteelAluminiumOther Industry

Exhibit 40: GNPA Movement in CFD segment


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

200909

200912

201003

201006

201009

201012

201103

201106

201109

201112

Com. Vehicle Utility Const Equip 3 W 2 W Cars

Exhibit 41: NNPA Movement in CFD segment


0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%

200909

200912

201003

201006

201009

201012

201103

201106

201109

201112

Com. Vehicle Utility Const Equip 3 W 2 W Cars



Fee income to remain one of the key growth drivers

The Bank has been focusing on broad-base and strengthen the fee-based income streams during FY08-11 resulting in a smart growth in non-interest income. IIB introduced new products and services such as investment banking and third party distribution (tie up with Aviva life for life insurance and Cholamandalan General Insurance for non-life insurance) etc. In addition, the Bank has tied up with HDFC Ltd for originating mortgages on its behalf. Going forward, we believe that IndusInd Bank will witness growth in fee based income (higher than the balance sheet growth) on account of focus towards corporate services, third party sales of financial products and investment banking. We expect the bank's fee based income to trend towards large private banks average of 0.7% of total assets in FY11-14. Credit Card Addition to fee income portfolio IIB bought entered into an agreement with Deutsche Bank to buy its credit card business in India. As per the agreement, IIB will get access to ~200,000 card customers and the entire operating platform of the cards franchise including technology. Entry into the credit card business would significantly enhance IIB’s product offerings. With this acquisition, IIB gets access to a strong customer base and a wide range of customer-centric financial products, enabling it to emerge as a full-service bank. Tie up with HDFC Ltd IIB has recently tied up with HDFC Limited for their home loan business, wherein the former will sell its mortgage products for a fee-based income. IIB is likely to earn a fee of 0.8-0.9% on these loans; if it is also cross-sells mortgage insurance products, it will earn an additional fee of 15bps, with an option to buy back 30% of the book. Moving forward, the Bank plans to upscale the growth momentum through further enhancements in diverse revenue streams such as foreign exchange business, investment banking, structured trade and treasury products, distribution of third party products like mutual funds and insurance, international remittances, bullion operations and transaction banking activities, including the depository business and the commodity market business. We expect fee income growth of 34% for FY12E and 32% for FY13E, as IndusInd Bank's expanded product suite is likely to generate significant fee income opportunities.



DU-PONT ANALYSIS

Exhibit 43: Du-Pont Analysis:

% of Average Assets FY08 FY09 FY10 FY11 FY12E FY13E FY14E

Interest Income 8.5% 9.1% 8.6% 8.8% 10.3% 9.8% 9.2%

Interest Expenses 7.1% 7.3% 5.8% 5.5% 6.6% 5.9% 5.5%

Net interest income 1.4% 1.8% 2.8% 3.4% 3.7% 3.8% 3.7%

Other income 1.3% 1.9% 1.8% 1.8% 1.9% 2.0% 2.2%

Total income 2.7% 3.7% 4.6% 5.1% 5.6% 5.9% 5.9%

Operating expenses 1.8% 2.3% 2.3% 2.5% 2.6% 2.9% 3.0%

-Employees 0.6% 0.7% 0.9% 0.9% 0.9% 1.0% 1.0%

-Others 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1%

Pre provision income 0.9% 1.5% 2.2% 2.6% 2.9% 3.0% 2.9%

Loan loss provisions 0.4% 0.6% 0.5% 0.5% 0.5% 0.4% 0.4%

Pre -tax pre extraordinary income 0.5% 0.9% 1.7% 2.1% 2.5% 2.5% 2.5%

(1- tax rate) 65.8% 65.3% 65.8% 65.7% 64.0% 64.0% 64.0%

RoA 0.3% 0.6% 1.1% 1.4% 1.6% 1.6% 1.6%

Avg assets/avg equity 18.4 16.9 15.5 12.6 11.7 12.4 13.0

RoAE 6.0% 9.8% 17.3% 17.8% 18.6% 20.1% 20.9%

Exhibit 44: Du-Pont Analysis with Peer Group

% of Average Assets Yes Bank Federal Bank HDFC Bank Axis Bank IndusInd Bank

Interest Income 8.5% 8.5% 8.0% 7.2% 8.8% Interest Expenses 5.9% 4.8% 3.8% 4.1% 5.5% Net Interest income 2.6% 3.7% 4.2% 3.1% 3.4% Other income 1.3% 1.1% 1.7% 2.2% 1.8% Total income 3.9% 4.7% 6.0% 5.3% 5.1% Operating expenses 1.4% 1.8% 2.9% 2.3% 2.5% Pre provision income 2.5% 3.0% 3.1% 3.0% 2.6% Pre -tax pre extraordinary income 2.3% 1.9% 2.3% 2.4% 2.1% (1- tax rate) 66.6% 65.1% 67.5% 66.0% 65.7%

RoA 1.5% 1.2% 1.6% 1.6% 1.4%Avg assets/avg equity 13.9 9.8 10.7 12.1 12.6

RoAE 21.1% 12.0% 16.7% 19.3% 17.8%

Based on a detailed DuPont analysis of IndusInd Bank, Return on equity has been improved significantly over past four years. Under controlled operating expenses/average assets and improved CASA franchise resulted in healthy margins which improved sharply from 1.4% in FY08 to 3.4% in FY11. Share of CASA in total deposits improved to 27% in FY11 from 16% in FY08. Focus on fee income and close eye on asset quality leading to lower provisions can also be attributed towards improved profitability. Going forward, scalability will be the main focus for the management. With the improved profitability strong liability profile, we expect IIB to record strong earnings growth. We expect IIB to continue with strong ROA and ROE at 1.6% and 20.1%-21% respectively in FY13-14E.



PREMIUM VALUATIONS TO CONTINUE….

After defeating the tough historical environment, IIB has proved itself one of the quality performers in the banking space. IIB witnessed commendable turnaround fundamentally during FY08-11 reflected in key parameters like RoA, RoE, NIMs, profitability etc. As a result, the stock has experienced premium valuation over the past one year. Well planned strategies to scale up the business, healthy growth in earnings, an improving liability franchise and sustained growth will provide further assistance to the premium valuations of IIB. The balance sheet is well capitalised with Tier-1 CAR of 10.7% as on Dec 2011.

Exhibit 45: PAT and Earnings growth % Exhibit 46: RoE and RoA %


‐1

‐0.5

0

0.5

1

1.5

0

200

400

600

800

1000

1200

1400

2004 2005 2006 2007 2008 2009 2010 2011 2012E2013E2014E

PAT (Rs cr) (LHS) Earnings Growth (%)

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2005

2006

2007

2008

2009

2010

2011

2012E

2013E

2014E

RoE % RoA % (RHS)

Exhibit 47: RoA (%) – Peer Group Exhibit 48: RoE (%) – Peer Group


0.0 0.5 1.0 1.5 2.0

SBI

Axis Bank

PNB

ICICI Bank

J&K Bank

BoB

HDFC …

Federal …

Karur …

Yes Bank

Bank of …

Indusind …

OBC

Indian …

Allahaba…

0.0 5.0 10.0 15.0 20.0 25.0

SBI

Axis Bank

PNB

ICICI Bank

J&K Bank

BoB

HDFC …

Federal …

Karur …

Yes Bank

Bank of …

Indusind …

OBC

Indian …

Allahaba…



Target price of Rs 387 per share

RoA and RoE of IIB are one of the highest in the industry. We expect IIB to deliver an impressive 32% earnings CAGR during FY11-14E. The stock trades at 2.8x FY13E and 2.3x FY14E ABV. We initiate our coverage on IIB with the blended target price of Rs 387, implying potential upside of 19%.

Exhibit 49: Blended Valuation Approach Methodology Weight Value Adjusted Book Value (FY13E) (Rs) 117.1 P/ABV Multiple 3.2 Value per share (Rs) 375 40% 150 EPS (FY13E) (Rs) 23.0 P/E Multiple 19 Value per share (Rs) 436 40% 174 Residual Income Method (Rs) 311 20% 62 BLENDED VALUE PER SHARE (Rs) 387 CMP (Rs) 325 UPSIDE 19%

Exhibit 52: 5 year Average PE Multiple Exhibit 53: 5 year Average P/ABV Multiple


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

May‐08

Aug

‐08

Nov

‐08

Feb‐09

May‐09

Aug

‐09

Nov

‐09

Feb‐10

May‐10

Aug

‐10

Nov

‐10

Feb‐11

May‐11

Aug

‐11

Nov

‐11

Feb‐12

PE 5 yr avg

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

May‐08

Aug

‐08

Nov

‐08

Feb‐09

May‐09

Aug

‐09

Nov

‐09

Feb‐10

May‐10

Aug

‐10

Nov

‐10

Feb‐11

May‐11

Aug

‐11

Nov

‐11

Feb‐12

P/ABV 5 yr avg

Exhibit 50: 1 year forward PE Band Exhibit 51: 1 year forward P/ABV Band


0

100

200

300

400

500

600

700

Mar‐06

Jul‐0

6

Dec‐06

Apr‐07

Aug

‐07

Dec‐07

Apr‐08

Aug

‐08

Dec‐08

Apr‐09

Aug

‐09

Dec‐09

Apr‐10

Aug

‐10

Dec‐10

Apr‐11

Aug

‐11

Dec‐11

Apr‐12

Aug

‐12

Dec‐12

share price 10x 15x 20x 25x

0

50

100

150

200

250

300

350

400

450

Mar‐06

Jul‐0

6

Dec‐06

Apr‐07

Aug

‐07

Dec‐07

Apr‐08

Aug

‐08

Dec‐08

Apr‐09

Aug

‐09

Dec‐09

Apr‐10

Aug

‐10

Dec‐10

Apr‐11

Aug

‐11

Dec‐11

Apr‐12

Aug

‐12

Dec‐12

Price 0.5x 1.5x 2.5x 3.5x



KEY RISK Cyclicality in CV business CV segment comprises 22% of IIB loan book. IIB is highly susceptible to growth and repayment risk during any slowdown in economy and hence industrial activity. Execution risk IIB has planned to strengthen its distribution network by adding ~650 branches in FY14 from the current network of 365 branches. While such large expansion will significantly increase the size of the business, the bank would also remain vulnerable to certain additional risk. Profitability of the bank will be adversely affected if it is unable to expand successfully or within the stipulated timeframe as required under the relevant licenses, including through the planned branch network expansion, or are unable to successfully integrate new branches into existing branch network. Further, the bank is also susceptible to cost escalation risks given its aggressive branch rollout plan. Increase in delinquency on account of aggressive growth plans IndusInd Bank's loan book has grown at 25% CAGR over the last four years on account of the bank's growth oriented strategy. However, given the deteriorating environment, operations may be adversely affected which may lead to increase in NPA levels. Increasing focus on CFD may lead higher NPAs Bank is in the process of re-proportionate its exposure to retail and corporate loan. Increasing exposure to consumer finance operations which even though is high yielding, it has higher slippages. Any failure on the part of the bank to keep this under check could increase the credit costs and impair profits.

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FINANCIALS

Profit & Loss a/c

Rs.cr FY08 FY09 FY10 FY11 FY12E FY13E FY14E

Interest Income 1881 2309 2707 3589 5298 6282 7344

Interest Expense 1580 1850 1821 2213 3398 3808 4381

Net Interest Income 301 459 886 1377 1900 2474 2963

Change (%) 53% 93% 55% 38% 30% 20%

Non Interest Income 298 490 553 714 963 1310 1769

Total Income 599 949 1440 2090 2864 3784 4732

Change (%) 58% 52% 45% 37% 32% 25%

Operating Expenses 403 578 736 1009 1345 1873 2396

Pre Provision Profits 196 371 703 1081 1519 1911 2336

Change (%) 89% 90% 54% 40% 26% 22%

Provisions (excl tax) 82 144 171 202 238 281 332

PBT 114 227 533 879 1280 1629 2004

Tax 39 79 182 302 440 560 688

PAT 75 148 350 577 841 1070 1316

Balance Sheet

Rs.cr FY08 FY09 FY10 FY11 FY12E FY13E FY14E Share Capital 320 355 411 466 466 466 466

Equity Application money 0 0 2 8 8 8 8

Reserves 1030 1309 1984 3576 4282 5138 6191

Net Worth 1350 1664 2395 4042 4748 5604 6657

Deposits 19037 22110 26710 34365 42957 53696 67120

Borrowings & Bills Payable 1413 3092 5317 5885 7819 9684 12015

Current Assets 2178 1924 2603 4025 4510 5638 7048

Investment 6630 8083 10402 13551 15883 20549 24805

Loans & Advances 12795 15771 20551 26166 34539 42137 52671

Fixed Assets 625 623 645 596 800 1103 1365

Other Assets 1091 1214 1230 1353 1734 1975 2717

Total Assets 23319 27615 35430 45691 57466 71401 88606



Key Metrics

FY08 FY09 FY10 FY11 FY12E FY13E FY14E

Growth ratios ABV per share 35% 26% 34% 53% 17% 17% 19% Advances 15% 23% 30% 27% 32% 22% 25% Deposits 8% 16% 21% 29% 0% 0% 0% PAT 10% 98% 136% 65% 46% 27% 23% EPS 10% 78% 104% 45% 46% 27% 23% Asset Quality Gross NPA (Rs cr) 392 255 255 266 380 506 590 Gross NPA % 3.1% 1.6% 1.2% 1.0% 1.1% 1.2% 1.1% Net NPA % 2.27% 1.14% 0.50% 0.28% 0.30% 0.35% 0.30% Slippage % 1.22% 1.39% 1.08% 0.73% 0.00% 0.00% 0.00% Coverage 26% 30% 60% 73% 73% 71% 73% Asset-Liability Profile Leverage (x) 15 15 13 10 11 11 12 CD ratio 67% 71% 77% 76% 80% 78% 78% CASA 16% 19% 24% 27% 28% 30% 33% Tier I CAR Profitability & Efficiency Net Interest Margin (after prov.) 1.0% 1.2% 2.1% 2.7% 0.0% 0.0% 0.0% ROA 0.3% 0.6% 1.1% 1.4% 1.6% 1.6% 1.6% ROE 6.0% 9.8% 17.3% 17.8% 18.6% 20.1% 20.9% Valuation Book Value per share (Rs.) 42 47 58 87 102 120 143 Adj Book Value per share (Rs.) 33 42 56 85 100 117 139 P/ABV (x) 3.8 3.26 2.78 2.33 P/E (x) 18 14.2 11.5



Disclaimer: This publication has been solely prepared for the information purpose and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed reliable investors are advised to satisfy themselves before making any investments. Fairwealth Securities Ltd does not bear any responsibility for authentication of the information contained in the reports and consequently is not liable for any decision taken based on the same. Further Fairwealth Research report only provides information updates and analysis. All opinions for buying and selling are available to investors when they are registered clients of Fairwealth Investment advisory services. As a matter of practice, Fairwealth refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that, Fairwealth securities Ltd, and/or individuals thereof may have positions in securities referred herein and may make purchases or sale while this report is in circulation.

Stock Ratings BUY The stock's total return is expected to exceed 15% over the next 12 months

ACCUMULATE The stock's total return is expected to be within 10‐15% over the next 12 months

HOLD The stock's total return is expected to be within 0‐10% over the next 12 months

SELL The stock's total return is expected to give negative returns over the next 12 months

NOT RATED The Analyst has no recommendation on the stock under review

RESEARCH

Name Designation Email ID Contact Number

Sharmila Joshi Head‐Equity [email protected]

09320159211

Prakash Pandey VP‐ Research & PMS [email protected]

09313337742/098670081721

Preeti Gupta Sr. Research Analyst ‐ Fundamental [email protected]

09867081737

Hitesh Parekh Research Analyst ‐ Fundamental [email protected]

022 39244988/9920616329

Hemen Kapadia Technical Strategist [email protected]

09821276177

Pervez Danish Sr. Technical Analyst [email protected]

09312873108

INSTITUTIONAL DESK

Name Designation Email ID Contact Number

Lokeshh N. Gowda Senior Manager ‐ Sales [email protected]

022 30720073

Rajan Bhatia Institutional Dealer [email protected]

022 30720057

FAIRWEALTH SECURITIES LTD. H.O.: Plot No. 651‐652, Udyog Vihar, Phase‐5, Gurgaon 122001 (Haryana) Phone: 0124‐3024400, Fax: 0124‐3024474 Website: www.Fairwealth.in . Email: [email protected]

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