Digital Shifts And RBI Regulations Will Undermine Legacy Banking

Key Takeaways

• Weak digital transformation, regulatory pressures, and costly legacy infrastructure are eroding competitiveness against digital-first banking rivals.
  
• Persistent asset quality issues and rising compliance costs are constraining profitability and limiting long-term growth prospects.
  
• Successful digital transformation, improved governance, and a profitability-focused strategy position the bank for stable growth, better margins, and increased confidence among investors and depositors.

Catalysts

Engages in the provision of various banking products and services to individuals, NRIs, business owners, corporates, and government and financial institutions.

• The rapid acceleration of fintech and digital-first competitors is likely to continue eroding IndusInd Bank's traditional retail and SME customer base, especially as the bank admits its digital transformation remains less robust than that of its largest peers. This will likely constrain both fee income and loan book growth over the long term.
  
• Intensifying regulatory scrutiny on data privacy, compliance, and governance, coupled with past governance lapses and senior management turnover, is expected to escalate ongoing compliance costs and operational risk, further weighing on net profit margins over multiple years.
  
• Elevated and persistent stress in key segments such as microfinance and commercial vehicle lending, combined with only gradual improvements in asset quality, signals an extended period of higher credit costs and non-performing assets that will continue to depress net earnings.
  
• Continued pressure from tightening RBI regulations and expected Basel III capital buffer requirements will require IndusInd Bank to maintain higher capital adequacy, limiting its ability to aggressively grow the loan book and thereby compressing long-term return on equity.
  
• The industry's rapid shift to branchless, self-service banking threatens to leave IndusInd Bank burdened with costly and underutilized legacy branch infrastructure, eroding cost efficiencies and compressing return on assets as high-yield digital-only rivals capture greater market share.

IndusInd Bank Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on IndusInd Bank compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming IndusInd Bank's revenue will grow by 22.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.7% today to 17.4% in 3 years time.
• The bearish analysts expect earnings to reach ₹57.0 billion (and earnings per share of ₹74.15) by about August 2028, up from ₹10.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.1x on those 2028 earnings, down from 60.4x today. This future PE is lower than the current PE for the IN Banks industry at 12.0x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.94%, as per the Simply Wall St company report.

IndusInd Bank Future Earnings Per Share Growth

Risks

• The rapid scaling and customer adoption of IndusInd Bank's digital platforms, such as the INDIE app and MSME-focused digital solutions, indicates a successful digital transformation that could enhance customer acquisition, improve cost efficiency, and strengthen fee income growth, which may support earnings and margins over the long term.
  
• The bank's strong capital adequacy ratio, at over 15%, and a robust provision coverage of 70%, provide a resilient buffer for future credit growth and risk mitigation, potentially enabling higher loan book expansion and supporting revenue and net profit improvement.
  
• Decisive steps taken to resolve legacy governance and microfinance issues, including upgraded systems, enhanced oversight, and improved compliance, may help restore investor and depositor confidence, thus supporting franchise stability and a recovery in deposit and lending growth, positively impacting revenue and earnings.
  
• Management's articulated profitability-first approach, including cost controls, focus on recovering bad loans, and the strategic pivot towards retail deposit granularity and away from lower-return wholesale/bulk deposits, could improve cost of funds, boost net interest margins, and lead to improved return on assets.
  
• The ongoing improvement in overall asset quality outside microfinance, continuous recovery efforts, declining restructured books, and consistent growth in retail assets (especially secured loans and home loans) suggest that the bank is positioned to capitalize on India's rising credit demand and financial inclusion trends, which could drive long-term revenue and earnings growth.

Valuation

• The assumed bearish price target for IndusInd Bank is ₹534.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of IndusInd Bank's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1266.0, and the most bearish reporting a price target of just ₹534.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹327.4 billion, earnings will come to ₹57.0 billion, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 14.9%.
  
• Given the current share price of ₹782.45, the bearish analyst price target of ₹534.0 is 46.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.