Rising Digitization And Urbanization In India Will Transform Retail Lending

Key Takeaways

• Shifting to retail deposits, resolving legacy issues, and a strong leadership team position IndusInd for industry-leading margin improvement and earnings growth.
  
• Exceptional digital engagement and tech investments accelerate customer acquisition and cross-selling, boosting fee income and enhancing long-term market share.
  
• Rising competition, asset quality stress, sluggish digitization, regulatory uncertainties, and cyclical exposure threaten IndusInd Bank's market share, profitability, and long-term growth potential.

Catalysts

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

• Analysts broadly agree that the shift to retail deposits will benefit cost of funds and net interest margins, but this likely understates the scale of margin expansion possible as further scope exists for significant rate cuts and continued shedding of high-cost, non-accretive wholesale deposits, potentially driving industry-leading margin improvement and substantially boosting earnings power over the next several years.
  
• While consensus expects digital growth to drive revenue, the remarkable surge in digital engagement-such as a 600% quarter-on-quarter growth in MF bookings and near-tripling of new savings accounts via the INDIE app-signals that IndusInd could rapidly capture a disproportionate share of India's fast-growing digital banking population, accelerating fee income and improving retention well ahead of peers.
  
• The recent decisive resolution of all legacy compliance, treasury, and microfinance issues, combined with imminent leadership stabilization and a rebuilt, high-caliber management team, eliminates major overhangs and positions the bank for a rerating as operational normalcy returns and financial metrics rebound steadily each quarter.
  
• Continued investment in technology and operational synergies across retail, MSME, and merchant segments amplifies cross-sell opportunities as smartphone adoption and financial inclusion accelerate in India, meaning customer lifetime value and overall non-interest revenue could rise at a much faster rate than the market anticipates.
  
• With a CET1 ratio above 15.5%, no near-term capital needs, and reduced reliance on cyclical segments, IndusInd is uniquely positioned to capitalize on opportunities from ongoing formalization and consolidation in India's banking sector, potentially increasing market share, stabilizing credit costs, and driving sustainably higher returns on equity over the medium-to-long term.

IndusInd Bank Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on IndusInd Bank compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming IndusInd Bank's revenue will grow by 34.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 5.7% today to 26.7% in 3 years time.
• The bullish analysts expect earnings to reach ₹116.0 billion (and earnings per share of ₹152.44) by about September 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 bullish analyst cohort, the company would need to trade at a PE ratio of 10.1x on those 2028 earnings, down from 58.0x today. This future PE is lower than the current PE for the IN Banks industry at 11.6x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.12%, as per the Simply Wall St company report.

IndusInd Bank Future Earnings Per Share Growth

Risks

• Rising competition from fintech disruptors and increased adoption of digital payments could erode IndusInd Bank's market share in core retail and MSME lending, while also compressing fee income as traditional transaction banking becomes less relevant, thereby negatively impacting long-term revenue growth and profitability.
  
• Elevated exposure to cyclical sectors such as commercial vehicles and corporate loans means that any economic downturn or sustained muted vehicle demand-as the bank itself noted-could result in asset quality deterioration, higher NPA levels, and increased credit costs, subsequently pressuring net margins and earnings.
  
• Ongoing asset quality pressures in the microfinance and merchant businesses, where recent books-even those built in the last 6-9 months-continue to show stress and elevated slippage rates, suggest a prolonged recovery process that could weigh on net interest income, provision requirements, and ultimately profit after tax.
  
• Slow pace of digitization relative to sector leaders, in combination with strategic cost containment, risks leaving IndusInd Bank with a less scalable and less cost-efficient operation; persistent rigidities in operating expense, despite temporary slowdown in growth investments, could erode cost-to-income ratios and crimp long-term earnings.
  
• Persistent regulatory overhang and uncertainty regarding promoter shareholding limits, along with recent senior management turnover and dependency on regulatory approval for a new CEO, introduce risks of capital-raising constraints, reputational impact, and heightened share price volatility, all of which could elevate the bank's cost of capital and undermine future growth prospects.

Valuation

• The assumed bullish price target for IndusInd Bank is ₹989.36, which represents two standard deviations above the consensus price target of ₹758.08. 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 bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1000.0, and the most bearish reporting a price target of just ₹534.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ₹434.4 billion, earnings will come to ₹116.0 billion, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 15.1%.
• Given the current share price of ₹751.25, the bullish analyst price target of ₹989.36 is 24.1% 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.