Jefferies raises target price of this Indian bank stock, recommends as its top pick

IndusInd Bank's (IIB) annual report for FY22 shows further improvement in retail deposit franchise & ALM that is helping narrow the gap in rates versus larger banks, highlighted global brokerage Jefferies.

"We will watch out for progress here, especially when rates are rising & growth is improving. NPLs fell and even as the bank partly used contingent provisions, it still carries enough buffer. New initiatives on liabilities, corp & rural banking can add longevity to turnaround in ROA. IIB is among the brokerage's top stock picks," the note stated.

The brokerage house has maintained its Buy rating on IndusInd Bank shares with a target price of ₹1,330 apiece (from ₹1,250). The bank stock has surged over 18% in 2022 (year-to-date or YTD) so far.

“We see a turnaround in earnings over FY22-24 with better growth and lower credit costs; expect ROA to improve to 1.7% and ROE to 15% by FY24e. We upgrade earnings by ~2%,” it added.

The lender's management will focus on 5 key areas raising retail liabilities' share from 41% to 45% by FY24 and ramping up non-resident banking, readjusting corporate banking with a focus on granular/working capital & better-rated loans (70% of loans have already churned), holistic rural banking platform by expanding suite of micro-lending products, scaling up domains of expertise and adding new growth segments (including AMC, broking, insurance), Jefferies highlighted.

“Even as IndusInd Bank's retail funds have come at a higher cost, the gap between the lender's 1-3 yr retail term deposits over SBI's has reduced from 190 basis points (bps) at the peak to 120-130 bps now. We believe it will be a commendable outcome if IIB is able to narrow this gap further in times of higher rates, pick-up in asset growth, and with dependence on wholesale deposits being higher than larger banks,” the brokerage's note said.

Jefferies believes IIB's asset quality pressures are behind as it has recognized/provided for most of the stressed book and the bank needs to strengthen the deposit franchise due to higher concentration & risk aversion among wholesale depositors.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.