IndusInd Bank’s Return Potential Heightened as Emkay Global Adjusts Target on Retail Book Strength

The bank’s leadership has explicitly emphasized the pivotal role of building a robust retail franchise over the next 2-3 years. Emkay Global Financial Services underscores this commitment, revealing that IndusInd Bank aims to elevate its retail LCR share from the current 44% to an ambitious 5-52%, representing a substantial progression from the 26% recorded a few years ago.

Breaking down the bank’s liability strategy, Emkay Global identifies key components crucial to this growth trajectory. These include a focus on differentiated product and pricing offerings, an expansion of ‘home market’ share from 3.7% to a targeted 5%, a strategic emphasis on affluent, NRI, and community banking segments, leveraging digital channels to connect with Gen Z/Millennial customers, and an expansion of its branch network.

In anticipation of these strategic moves, Emkay Global has recalibrated its earnings estimates for FY24-26E, foreseeing a positive impact on financial metrics. The projections include an expected improvement in Return on Assets (RoA) to the range of 1.9-2%, Return on Risk-Weighted Assets (RoRWA) at 2.6-2.8%, and a robust Return on Equity (RoE) estimated to reach 16-18%. These positive forecasts are rooted in expectations of healthy growth, stable margins, and an enhanced Loan Loss Provision (LLP).

Emkay Global further underscores the financial strength of the bank, citing healthy contingent provisions (0.5% of loans) and substantial capital buffers (Common Equity Tier 1 at 16.3%). The brokerage also points out that any additional capital infusion by promoters to increase stake would serve to further fortify the bank’s capital levels, contributing to its resilience.

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Maintaining a ‘Buy’ rating on the stock, Emkay Global has revised the target price upward from ₹1,825 to ₹2,000 per share. This adjustment reflects a potential upside of over 28% from Monday’s closing price, signaling confidence in the bank’s strategic direction.

IndusInd Bank’s recent credit growth of 21% in Q2FY24 underscores its proactive approach to incremental growth. Rather than merely pursuing expansion, the bank is guided by a strategy centered on delivering better Risk-Adjusted Return on Capital (RARoC) (>2.5%).

The bank envisions key growth drivers in segments such as mortgages, with a specific focus on affordable housing, SME/mid-corporates, and credit cards. Emkay Global highlights the bank’s intention to increase the share of credit cards from the current 3% to an envisioned 5%. Simultaneously, the bank plans to gradually reduce the relatively risky MFI share from the current 11% to a targeted 8-10%, maintaining the present share of unsecured loans.

IndusInd Bank’s share price has displayed commendable performance, witnessing a 6% increase in the past three months and an impressive 27% rise year-to-date (YTD). As of 11:45 am, IndusInd Bank shares were trading 0.25% higher at ₹1,561.00 apiece on the BSE.

As the bank strategically navigates the evolving financial landscape, stakeholders closely monitor its proactive measures, resilience, and potential for sustained growth. The intersection of strategic banking initiatives, evolving market dynamics, and regulatory considerations adds layers of complexity to the narrative, making IndusInd Bank’s journey a noteworthy storyline within the broader financial landscape.