Banks enjoyed an expansion in Net Interest Margins (or NIMs) as well as in credit demand through the 2022-23 financial year (FY23).
The credit expansion was because economic growth continued to recover from the Covid-19 years, and indeed, second half GDP growth surprised on the upside.
The NIM expansion was because banks raised lending rates immediately (in many cases automatically due to floaters) as the Reserve Bank of India (RBI) hiked policy rates, and only started raising deposit rates late into the fiscal.
However, although the RBI has hit pause on the rate hikes, the chances are there will be NIM compression in the next six months and maybe the entire FY24 since banks are now seeing tight credit-deposit ratios and raising deposit rates to attract inflows.
In addition to better NIM, and higher credit demand, Credit Costs also declined as Asset Quality improved.
IndusInd Bank (IIB) was one of the best performers.
It has also seen strong share price trends, hitting a 52-week high.
IIB reported stable NIMs, robust loan growth and strong RoA (return on assets) though it saw sequentially higher gross slippage.
In the January-March quarter (Q4) of FY23, the bank reported profit after tax (PAT) at Rs 2,040 crore, up 50 per cent year-on-year (YoY) (up 4 per cent quarter-on-quarter or QoQ), on the back of 13 per cent YoY growth (2 per cent QoQ) in core operating earnings and moderation in credit costs.
Annualised RoA is strong at 1.9 per cent for Q4FY23 and 1.8 per cent overall for FY23.
IIB’s valuations still look inexpensive at less than 2x Adjusted Book Value.
With a significant reduction in the book of restructured loans and an improving outlook in micro finance (MFI) and the commercial vehicles businesses, the bank should see improvement in gross slippages and credit costs.
Asset quality performance was soft, however, with gross slippages rising 9 per cent QoQ in Q4 over Q3 of FY23.
This included one corporate exposure (about Rs 1,750 crore) turning non-performing assets (NPA) for technical reasons.
The rise in non-restructured retail slippages was mainly due to higher MFI slippages in select locations such as West Bengal.
The gross NPA increased 2 per cent QoQ but the gross NPA ratio fell 8 basis points (bps) QoQ to 1.98 per cent.
The PCR (provision coverage ratio) was stable QoQ at about 70 per cent and the net NPA ratio declined marginally to 0.59 per cent.
The bank has offered confident guidance under its “Planning Cycle 6” (PC-6) to focus on 3Gs – growth, granularity and governance.
It aims for 18-23 per cent loan growth, improved share of retail in both loans and deposits and PPOP (pre-provision operating profit) margins at 5.25-5.75 per cent.
Key domain businesses would remain vehicle finance, microfinance and gems & jewellery.
In addition, the bank would also focus on scaling loans against property, affordable housing, home loans, SME loans and merchant loans.
The branch network is to expand to 3,250-3,750 (vs 2,606 at present) and the customer base target is 50 million-plus (34 million currently).
The bank targets RoA of 1.9-2.2 per cent for FY24-FY26.
Analysts say these targets can be met despite concerns about volatility in asset quality.
The stock is trading at Rs 1,336 per share and hit a high of Rs 1,342.65 on Tuesday. It has gained over 30 per cent in the last two months.
Analysts continue to be positive on the stock in general.
According to Bloomberg, 13 of the 16 analysts polled since May have a ‘buy’/’outperform’/’overweight’ rating on the stock (3 have ‘hold’; nil have ‘sell’) with average target price of Rs 1,448.
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