Bank On IndusInd Even As Merger Talks With Bharat Financial Inclusion Making Rounds

Bank On IndusInd Even As Merger Talks With Bharat Financial Inclusion Making Rounds

Industry

Future of banking and financial services in our country looks extremely promising given the immense potential and importance which have been attached to the sector. Improved performance of the banking industry in India has helped the economy to perform better than the peers in terms of growth and also financial inclusion of masses. According to the Reserve Bank of India (RBI), the banking sector in India is ‘sound, adequately capitalised and well-regulated.’ Country’s economic progress is largely dependent on the financial sector’s performance. Ever since the central government announced its demonetisation drive, the banking sector has been in the focus of everyone starting from common person on the streets to elite financial analysts tracking the banks and related sectors.

Issues pertaining to assets quality for the banks seem to be bottoming out, this what the recent Q3 earnings of major banks suggests and road ahead is only going to better.

Amongst all the commercial banks operating in the country IndusInd Bank has been one of the best performing banks with above industry growth rates seen in key parameters.

Hinduja Group promoted IndusInd Bank commenced its operations in the year 1994. IndusInd Bank derives its name and inspiration from the Indus valley civilisation - a culture described as one of the greatest ones in the ancient world combining a spirit of innovation with sound business and trade practices. IndusInd Bank has grown ceaselessly and dynamically as an organisation driven by a sincere zeal to give its customers banking services and products at par with the highest quality standards in the industry.

IndusInd boasts of having more than 1075 branches and over 1,960 ATMs spread across the country. The bank also has representative offices across the globe.

In what could be one of the biggest mergers taking place in the financial services space, Dalal Street seems to buzz with certain media reports of IndusInd Bank moving a step closer to merging Bharat Financial Inclusion (BFI) with itself via a share swap agreement between the two entities. The bank over the years has been trying to increase its lending presence towards the priority sector but has not succeeded in doing so. Merging with BFI would certainly make sense for the bank given the wide reach and expertise that the micro-lender possesses.

Coming together of both the financial institutions would make sense for both the parties as it would significantly derive synergy benefits from the possible merger with diversified loan book across the segment. However, on the face of it. BFI would benefit a lot by way of low cost of funds and no cap on lending with no uncertainty related to socio-economic events. IndusInd Bank merger would significantly help the bank in shoring up its priority sector lending from the current levels.

The possibility of merger looks a possibility at this moment as BFI’s ultimate objective is to get a banking license and getting merged would only help the cause. Merger would be win-win deal for both the entities and make IndusInd Bank a better financial services company providing an array of services under its brand.

If the merger happens street would keenly watch the pricing at which the deal takes place between the parties. If the bank pays significant premium to BFI shareholders than it may dent the prospects of IndusInd Bank.

For IndusInd Bank, the "Customer Responsiveness" theme has always been of paramount importance to provide customer satisfaction. Bank has been at the forefront of several first of kind services/innovations which further improves a customer's banking experience. The bank has been heavily focussing on digitisation of banking operations in line with the government’s theme of less cash economy. The bank prides itself of having been able to understand its customer's needs and provide solutions.

On the financial front, IndusInd Bank has been a rank outperformer on a consistent basis. Considering its latest quarterly result, IndusInd Bank reported a net profit growth of 29.2 per cent to Rs 750 crore as against Rs 581 crore achieved in the same period of the previous fiscal. Demonetisation seems to have had no major impact on IndusInd Bank in Q3. Net Interest Income (NII) the difference between interest earned and interest expended, increased by 35 per cent to Rs 1578 crore. Fee income also saw a healthy growth of 21 per cent.

Net Interest Margin (NIM) for the quarter ending December 31 saw a marginal improvement of basis points to 4 per cent on yearly basis. Operating profit for the quarter was Rs 1,363.34 crore as against Rs 1,060.98 crore in the corresponding quarter of the previous year, showing a growth of 29 per cent. Demonetisation has had a positive rub off effect on the CASA ratio as it improved to 37.04 per cent against 34.98 per cent. Total Advances as of December 31, 2016, is at Rs 1,02,770 crore as compared to Rs 82,167 crore on December 31,2015, recording a growth of 25 per cent.

While the overall banking industry is battling non-performing assets menace, on the contrary IndusInd Bank has delivered good numbers when it comes to asset quality.

Net NPA as on December 31, 2016 came in at 0.39 per cent as against 0.33 per cent on December 31, 2015. Total slippages increased slightly sequentially to Rs 281 crore. The bank over a period of time has maintained asset quality which have been better than the industry average. Private lender has largely remained unaffected by asset quality woes impacting other banking peers. Bank has fared well over the years in terms of asset quality with. Diversification of loan book has been one of the major factor leading to a steady performance on the asset quality front. The composition of the loan book is well balanced at this point of time with corporates accounting for close to 60 per cent of loan book and the rest 40 per cent made up of retail financing.

With a clean balance sheet and strong management at the helm of affairs at IndusInd Bank, it certainly gives more potential to grow in times to come. Bank Return on Asset (ROA) is one of the best ones at 1.88 per cent, with a return on equity (ROE) at 15.72 per cent. Profitability of the bank has been on an upswing from previous several quarters which has boosted earnings per share (EPS) to 50.28 at the end of December 31.  

In the past year, IndusInd Bank has been trading at substantial premium valuations compared to its private sector peers which has been aptly justified by the financial performance delivered over the quarters. However, when compared to private peers like HDFC Bank, Kotak Mahindra and Yes Bank, IndusInd Bank trades at higher valuation of price to book value of 4.13 compared to 4.03; 3.95 and 3.80 times. Therefore, from a risk reward point of view IndusInd Bank gives limited scope for a substantial move. Therefore, we advise all our readers to’ HOLD’ IndusInd Bank.

"Strong core profitability (3 per cent-plus of average assets versus private banks average of 2.5 per cent), improving CASA ratio (best amongst mid-sized private banks), healthy return ratios (ROA of 1.9 per cent-plus and ROE of 15-17 per cent and capitalisation (CET1 ratio of ~ 14.7 per cent) are key positives. Third phase of growth cycle is likely to focus on building scale with 3Ds strategy of Dominate (among top 3 banks in home markets), Differentiate and Diversify. Management’s execution in first two planning phases has been impeccable and increases our comfort. We expect IIB to report strong 20 per cent-plus loan CAGR driven by multi products, new product addition and market share gains. NIMs are expected to remain largely stable led by higher share of retail liabilities, expected improvement in loan mix towards high yielding CFD, benefit of falling interest rate cycle and higher share of fixed rate loans. Overall superior margins, focused fee income strategy and control over C/I ratio will keep earnings momentum healthy ( ~ 23 per cent CAGR over FY16-19). "

Alpesh Mehta – Deputy Head of Research & Banking Analyst, MOSL