IndusInd Bank: No respite on asset quality yet as telecom exposure spooks

Despite the bank clarifying on its telecom sector exposure, it hasn't helped the stock price much

IndusInd Bank’s stock hit a three-year low on Tuesday, when it tanked over two per cent to end the day at Rs 1,140. Even if over 70 per cent of analysts polled by Bloomberg are positive with an average target price (Rs 1,676), the Street’s actions don’t echo this stance given that, among top private banks, IndusInd has had the biggest fall of over 24 per cent in CY2020 so far.

Marred by concerns, especially the uncertainties over its telecom exposure, the compulsion to remain positive seems to be drying up fast. This probably explains why, despite the bank clarifying on its telecom exposure, the needle didn’t move much. Also, while the telecom sector exposure is restricted to 1.2 per cent of its total book, and fund-based exposure to Vodafone India is Rs 995 crore (non-fund based Rs 2,409 crore), the worry is whether IndusInd can afford another round of asset quality pressure.

With the IL&FS and housing finance companies related bad loan pressures hitting the bank, its gross non-performing assets (NPA) ratio touched a multi-quarter high of 2.2 per cent in December quarter (Q3). As per estimates of Suresh Ganapathy of Macquarie Capital, total exposure to the three main stress sectors – real estate (including lease rentals), telecom and possibly gems and jewellery stands at about 13 per cent of loan book. “In addition, there are worries cropping up over the microfinance (10 per cent of loan book) and commercial vehicles (CV; 16 per cent) book,” he adds. Even if one were to regard the stress in CV loans as cyclical, how other sectors play out will be closely monitored.

The larger worry is also a likely deferral in its asset quality improvement. The management, in its Q3 result meet, indicated at normalisation of asset quality in FY21. However, Morgan Stanley estimates gross NPA as a ratio of total loans to touch 3.7 per cent in FY22 from Q3’s 2.2 per cent. The brokerage had earlier estimated FY22 gross NPA ratio at 2.4 per cent. “We had built in elevated provisions, but see increased risk in some sectors. This drives increases in our provisioning estimates from 145-155 basis points earlier for FY22 to 165-250 basis points now and cuts in earnings estimates of 29 per cent for FY21 and 11 per cent for FY22,” the brokerage adds.

The Street is also apprehensive on the bank’s silence in revealing the successor to Romesh Sobti, who is expected to step down as its MD & CEO on March 23.

With uncertainties clouding over, investors need more comfort than just valuations at 2x FY21 book.