Expected Repo Rate Cuts And Digital Banking Will Stimulate Future Borrowing

Key Takeaways

• Expected repo rate decline may boost loan growth and revenue as borrowing becomes more attractive.
  
• Growth in retail deposits and digital banking may improve margins and earnings through lower-cost funding and increased transactions.
  
• Increased slippages and delinquencies in microfinance and unsecured loans threaten net margins, earnings, and profitability due to higher credit costs and NIM compression.

Catalysts

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

• The expected decline in repo rates by RBI could stimulate economic activity, potentially boosting loan growth and increasing revenue for IndusInd Bank as borrowing becomes more attractive.
  
• Robust growth in retail deposits, particularly NRI and affluent segments, may provide a lower-cost funding base, improving net margins by reducing reliance on higher-cost deposits.
  
• Continued development and traction in digital banking platforms like the INDIE app are expected to increase customer engagement and transactions, potentially boosting fee income and overall earnings.
  
• The vehicle finance segment is anticipated to benefit from improved economic conditions and festival season demand, potentially enhancing revenue and asset quality.
  
• Strategic focus on secured lending and corporate banking, particularly among mid and small corporates, could stabilize asset quality and support revenue growth by diversifying the bank’s loan portfolio.

IndusInd Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming IndusInd Bank's revenue will grow by 21.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 31.2% today to 28.1% in 3 years time.
• Analysts expect earnings to reach ₹130.5 billion (and earnings per share of ₹167.82) by about December 2027, up from ₹81.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹152.3 billion in earnings, and the most bearish expecting ₹104.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2027 earnings, up from 9.4x today. This future PE is lower than the current PE for the IN Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.15%, as per the Simply Wall St company report.

IndusInd Bank Future Earnings Per Share Growth

Risks

• The bank is experiencing increased slippages in the microfinance business, which may continue to pressure asset quality and elevate credit costs beyond the current expectations of 110-130 basis points. This could negatively impact net margins and earnings.
  
• Deterioration in credit card and unsecured loan segments has led to higher-than-anticipated delinquencies, posing a risk to revenue recovery and potentially compressing net interest margins.
  
• Exposure to economic and sector-specific stresses, including regional disturbances and weather impacts affecting rural demand, could slow loan growth and impact revenue projections.
  
• NIM (Net Interest Margin) compression due to decreased high-yield microfinance contributions and an unfavorable loan-to-deposit ratio may limit profitability improvements, thus impacting net margins and earnings.
  
• Fluctuations in risk weightage of microfinance loans by regulatory authorities (e.g., increased from 75% to 125%) can require higher capital adequacy, limiting available capital for growth, thus impacting profitability.

Valuation

• The analysts have a consensus price target of ₹1473.14 for IndusInd Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1844.0, and the most bearish reporting a price target of just ₹1119.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹465.2 billion, earnings will come to ₹130.5 billion, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 14.1%.
• Given the current share price of ₹984.85, the analyst's price target of ₹1473.14 is 33.1% higher.
• 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.