Game of loans: Investors reward IndusInd Bank's clean-up act

MD says much of the exposure may be recovered via asset sale; Q4 largely satisfactory sans IL&FS impact

Investors upset with the IndusInd Bank stock, which has underperformed peers in the past one month, have reasons to cheer after the bank clarified its position on asset quality troubles that have emerged lately. 

This is shares of IndusInd Bank rose about 5 per cent on Wednesday, despite the lender’s net profit falling 62 per cent year-on-year (YoY) to Rs 360 crore in the March quarter (Q4). Following the diktat of the Reserve Bank of India, IndusInd Bank classified its Rs 3,000-crore exposure to the beleaguered IL&FS group as non-performing assets (NPA) in Q4.

This impacted net interest income (NII) — down 2 per cent sequentially — as well as provisioning costs, which rose about 370 per cent YoY to Rs 1,561 crore. NII was dragged by Rs 154 crore in interest accrual (from IL&FS), which was reversed in the quarter. With the bank reversing the earlier contingent provisioning of Rs 530 crore and making fresh provisions of Rs 1,273 crore in Q4, investors can assume that the ghosts of FY19 may not haunt them in this financial year. 

Following the write-off of Rs 1,000 crore towards the infrastructure group, the bank’s exposure to IL&FS’ holding company (Rs 2,000 crore) is now 75 per cent provided for, with a fourth of the Rs 1,000-crore exposure to special purpose vehicles (SPVs) having been taken care of earlier. 

A confident Romesh Sobti, managing director and chief executive officer of IndusInd Bank, says much of the exposure should be recovered via sale of assets in FY20.

With respect to the fresh can of worms — a potential 1.9 per cent (Rs 3,500 crore) of IndusInd Bank’s total book exposed to a troubled media house, non-banking financial company, and a diversified business group — the bank states that these accounts are standard assets and the lender is well-positioned to handle any pain that could unfold in future. 

While this may put to rest speculation around its exposure and asset quality pain from troubled borrowers, it essentially means that gross NPA ratio, which almost doubled to 2.1 per cent in Q4, may not materially cool off soon. Yet, if the impact of IL&FS is removed, Q4 was largely satisfactory. 

For investors, the net interest margin (NIM) trajectory will also be a key monitorable. NIM, adjusted for the IL&FS impact, at 3.84 per cent, was lower than the near-4 per cent mark a year ago, partly impacted by the rise in cost of funds. 

The lag impact of loan re-pricing has been exerting pressure on NIMs, which may continue until interest rates see stability, say analysts at PhillipCapital.

Although valuations at 3 times its FY20 book appear reasonable, it could be a tight rope-walk for IndusInd Bank, given how yield on assets, advances, and asset quality came under pressure in Q4.