IndusInd Bank share price surges 11%; here’s why brokerages are bullish despite fall in profits

IndusInd Bank share price jumped up by over 11% during trade on Tuesday despite the private lender reporting a 16% fall in profits on Monday. The fall in profits has, however, not deterred brokerages from recommending investors to buy IndusInd Bank stocks. With 44% on-year growth in net interest income, IndusInd Bank’s profitability is not going unnoticed and neither is its strong growth in retail assets, up by 20%. The scrip has shows recovery its March lows and is now down 69% year to date, with a 10% recovery recorded in the month of April.

The private sector lender has evaluated the impact of coronavirus on its business, expecting GNPA rise of up to 80bp and an additional credit cost of 50bp. “IndusInd Bank has created Rs 2.6 billion additional floating provision buffer, Rs 750 million toward telecom exposure and Rs 230 million toward dpd accounts where it has availed standstill benefit,” said brokerage and firm Motilal Oswal in a research note on IndusInd Bank. The brokerage has a ‘buy’ call on the stock with a target price of Rs 700, which would translate to an upside of 72% from Monday’s closing levels.

The fall in bank’s reported profits was owing to the higher provisions of Rs 24.4 billion, made on account of the coronavirus pandemic. Motilal Oswal expects loan growth to moderate led by a weak environment due to the coronavirus outbreak, driving a slowdown in consumer spending. “Further, we expect asset quality to deteriorate due to rising stress in corporate/MFI/CV/CE portfolio. Thus, we estimate credit costs to remain elevated at 2% for FY21E. IIB should deliver FY21E RoA/RoE of 1.5%/13.3%,” the brokerage said.

On the loan moratorium front, IndusInd Bank said that 95% of vehicle customers, 99% of MFI customers and 96% of overall retail customers paid March installments before the lockdown. “Improvement in core profitability (PPoP grew >3% QoQ) was supported by better NIMs and steady growth. NIMs improved further,” said brokerage and research firm Edelweiss. Net interest margins were up 10bps on-quarter basis, deriving benefit from the rising retail book and lower funding cost. Edelweiss has a ‘buy’ call on IndusInd Bank with a target price of Rs 1,803 per share.

Concerns over asset quality of the lender are likely to dominate core business momentum gains for the foreseeable future, said Edelweiss. Other risk factors associated with the bank include — the recent merger with Bharat Financial Inclusion and the below-trend growth in fee income seen by the bank.

On the flip side, HDFC Institutional Research refuses to share the optimism of Motilal Oswal and Edelweiss. With an upward revision in target price, HDFC Institutional Research has an ‘Add’ rating for IndusInd Bank, which limits the predicted upside to somewhere between 5%-15%. The target price has been changed from Rs 571 to Rs 575. “IndusInd Bank may face serious near-term challenges- asset quality risks stemming from its exposure to risky sectors (microfin., telecom, NBFCs, CRE) and scaling its granular deposit base. Higher provisions on anticipated stress will dent RoE,” it said.

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