IndusInd Bank stock likely to gain nearly 40%, believes ICICI Securities — here’s why

Despite a weak performance in 2024 year-to-date (YTD), domestic brokerage house ICICI Securities has maintained its ‘buy’ recommendation for IndusInd Bank, setting a target price of ₹2,000. This suggests a potential upside of over 38 percent.

The stock has increased by 4 percent over the past year but has declined by over 9 percent in 2024 YTD.

"IndusInd Bank ranks highest on risk-adjusted yields and second on risk-adjusted NIM among large private banks. Despite potential MFI stress in the first half of FY25, we remain confident in our FY24-26 gross slippages and credit costs estimates of 1.8 percent and 1.2 percent, respectively. We maintain our BUY rating," said the brokerage.

ICICI Securities also noted that, despite slower-than-expected credit growth in Q1FY25, their loan CAGR estimate for FY24–26 remains unchanged at 18 percent. They project IndusInd Bank to deliver a steady 1.9 percent RoA and 16 percent RoE for FY25/26.

Key risks include a potential moderation in loan growth and a less-than-full-term extension for the incumbent MD & CEO, warned ICICI.

Stock Price Trend

The stock has given positive returns in just 2 of the 7 months of the current calendar year. It has lost 13 percent in July after a flat but green June. It again witnessed a setback in May and April, down 3.5 percent and 2.4 percent, respectively. However, March was a strong month for the lender with its stock rising 5.3 percent. Prior to that, the stock declined January and February as well, down around 4 percent each.

The stock had hit its 52-week high of ₹1,694.35 in January 2024. Currently trading at ₹1,446.25, it is almost 15 percent away from its year high. Meanwhile, it has advanced around 7 percent from its 52-week low of ₹1,354.70, hit in August last year.

Investment Rationale

ICICI Securities analysed the asset quality performance of IndusInd Bank (IIB), highlighting its resilience and consistent improvement over the past few years. Following a dual impact on its corporate and retail sectors during FY18–22, IIB has made significant strides in improving its gross and net slippages, it said.

Steady Improvement in Asset Quality

The brokerage pointed out that IndusInd Bank faced significant challenges between FY18 and FY22. Initially, the corporate sector was affected by tight liquidity conditions post the IL&FS crisis (FY18-20). Later, the retail sector was impacted by the pandemic (FY20–22). Despite these hurdles, the bank has demonstrated robust performance in asset quality.

In FY24, gross slippages were below 2.0 percent, marking their lowest level in six years. Similarly, net slippages improved to 1 percent, comparable to FY18 levels. Gross NPAs improved from a high of 2.7 percent in FY21 to less than 2 percent in FY24. Net NPAs remained low at approximately 0.6 percent, with the provision coverage ratio (PCR) consistently above 70 percent over the last three years, up from 45-55 percent, highlighted ICICI.

Relative Comparison with Peers

Although IndusInd Bank has shown remarkable improvement in its gross and net slippages, its performance is somewhat overshadowed by the superior results of its peers. While the bank has seen significant improvements over the past 2–3 years, its levels remain higher compared to the private banking sector and system aggregates.

Importance of Standalone Performance

ICICI Securities also emphasised that a standalone evaluation of IndusInd Bank's performance is more meaningful than relative comparisons due to significant differences in loan mix. The bank has a higher proportion of unsecured loans (credit card, personal loans, and MFI) at approximately 17 percent, compared to 11–12 percent at Axis Bank, HDFC Bank, and Kotak Mahindra Bank. Furthermore, IndusInd Bank's share of less risky home loans is less than 5 percent, whereas large private banks have a home loan share of 25–33 percent, it added.

Higher Yields Reflect Asset Mix

The distinct loan mix at IndusInd Bank is also reflected in its higher yields. The bank's loan yields for FY24 are 180–250 basis points higher than those of large private banks. Similarly, the asset yields for FY24 are 100–180 basis points higher than those of its larger peers, stated ICICI.

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"We believe that IIB is well placed on growth and NIM. Despite slower-than-expected Q1FY25 credit growth, as per its provisional business update, we estimate an 18 percent loan CAGR for FY24–26E. The bank is also well placed on the interest rate cycle with higher share of fixed-rate loans. Overall, we see the bank delivering amongst highest NII and PPOP growth driven by steady NIMs and superior growth," said the brokerage.

ICICI Securities' report underscores the steady improvement in IndusInd Bank's asset quality, despite facing multiple challenges in the past. While the bank's performance may seem less impressive in comparison to its peers due to differences in asset profiles, its standalone achievements highlight a consistent upward trajectory. The higher yields indicate a strategic focus on a more profitable, albeit riskier, loan mix. This approach, coupled with continuous improvements in asset quality, positions IndusInd Bank as a resilient player in the private banking sector.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.