Investment in IndusInd Bank stocks a value bet, but tread with caution

The prolonged correction in banking stocks has tempted investors to look at underperformers. IndusInd Bank, despite its massive recovery from its all-time low of Rs 235 a share, is one such candidate thanks to its 65 per cent year-to-date underperformance.

Trading below its book value (0.9x its FY22 estimated earnings), analysts at Nomura, UBS, and CLSA are positive, primarily for its beaten-down valuation.

However, immediate upside may be capped considering the lender’s operational and balance sheet challenges. Two of IndusInd Bank’s critical segments — vehicle and microfinance (MFI) loans — are still in the nascent stages of recovery.

These two segment account for 25 per cent and 12 per cent of the overall portfolio, respectively.

Reports suggest collection efficiency for both portfolios may have climbed to 75-85 per cent. However, fresh loan disbursements are far from normal for MFI and vehicle loans. Commercial vehicles account for over half of the vehicle loan portfolio. Hence, a recovery in demand and disbursements may be more protracted as the segment was facing a slowdown even before the pandemic.

The impact of these segments on asset quality hinges on the willingness to restructure these loans.

Of its total book, 19 per cent was under moratorium. Corporate loans have been under stress since Q3FY20, and slippage ratio at 3.1 per cent (as of Q1FY21) despite the moratorium is worrying. Analysts at Nomura have factored in credit cost at 4.8 per cent for FY21, while those at CLSA peg it at 6 per cent, due to the likely stress in corporate, vehicle and MFI portfolios.

“We think exposure to vulnerable segments remains high, and credit cost in this cycle will remain elevated,” says Nomura.

Asset quality challenges have compounded the bank’s woes. While it managed to sustain its net interest margin (NIM) at 4.3 per cent in Q1 owing to the high yielding MFI book, net interest income recorded a mere 3 per cent YoY growth. Weak loan growth of 2.4 per cent YoY impacted fee income too. What brought relief, was the 5 per cent YoY rise in deposits following a troubled March quarter. With focus shifting to retail term deposits — where rates are 150-200 bps higher than peers — a likely NIM moderation cannot be ruled out, according to CLSA.

Since valuations appear to have factored in these concerns, any miss in estimates could lead to correction. Hence, it is best suited to long-term investors with some appetite for risk.