>INDUSIND BANK: Into the next orbit (IDFC SSKI)

After a spectacular turnaround, IndusInd Bank is working to gain scale. Marked improvement is evident in operating metrics, and the initial three-year targets have been accomplished in just two years. Now, ‘profitability with scalability’ is the new mantra with a clear intent to fast-track growth. With focus on fortifying the liability franchise (700 branches by FY13E), we expect 41% CAGR in the bank’s earnings over FY10-12. To account for higher loan growth and increasing comfort on asset quality, we upgrade our FY11E and FY12E earnings by 6.8% and 9.4% respectively. While the stock has outperformed the Sensex by a hefty 80% since September 2009, we expect strong growth in earnings as also assets to drive stock performance hereon. In view of RoA expansion of 30bp over FY10-12E to 1.4%, we see stock returns outpacing the ~25% CAGR in assets. IndusInd Bank remains our top mid-cap pick among financials.

■ Remarkable progress over the last two years: A strong and well-incentivized management has enabled the bank to acquire a strong footprint despite its late entry in the crowded banking space. Over FY08-10, NIMs have surged by 150bp to 2.8%, fee income has grown 85% and cost efficiency has improved (cost to income down from 67% to 51%) – all converging into RoA expansion of 80bp to 1.1% in FY10.

■ Fast-tracking future growth: IndusInd Bank plans to aggressively expand its branch network from 210 currently to ~350 by FY11 and 700 by FY13. A stronger branch network as also liability base in a recovering economy place the bank in a sweet spot to achieve ~30% CAGR in its loan book in next two years – well above the industry average of 20%. Also, NIMs are expected to expand to 3.1% as the liability mix turns favorable (CASA deposits seen at 28% by FY12) and elevated yields on retail loans.

■ Strong earnings ahead; outperformance to continue: Above-industry loan growth, improving margins, increasing efficiency and lower provisioning costs are expected to drive RoA expansion of 30bp to 1.4% in FY12. Despite the recent re-rating on market cap to assets metric, the stock still trades at a discount of 20%+ to peers. Going forward, on the back of above-industry growth and a consistent rise in RoA, we expect stock returns to outpace growth in assets. At 2.5x FY12E adjusted book, we reiterate Outperformer.

To read the full report: INDUSIND BANK