After a lull, IndusInd Bank on course to regain investor confidence

The stock has gained over 22 per cent since announcement of the September-quarter results, indicating the Street sees some merit in management's asset-quality guidance

After a long spell of being shunned by investors, IndusInd Bank seems to be on the path to regaining some of the lost trust. Gains of 22 per cent for the stock since the bank declared its September-quarter (Q2) results suggest investors see some merit in the bank’s asset-quality guidance.

The bank’s gross non-performing assets (NPA) during the quarter rose to 2.15 per cent while its slippages or loans turning bad more than doubled on a year-on-year basis to Rs 1,102 crore. Not only was this the steepest increase in stress seen by the bank, but the fact that it came at a time when the management commentary was turning positive on asset quality spooked investors, prompting analysts at Bernstein to question the quality of the loan book.

Yet, thankfully for the banking system as a whole, no fresh trouble has emerged in the past month. Siddharth Purohit of SMC Capital says this has helped sentiment turn in favour of the bank. “In the near term, the possibility of trouble from the telecom sector exposure also seems low,” he adds.

According to analysts, investors are also recognising the bank’s efforts in reducing its exposure to assets identified as potentially troublesome. The reduction in its watch list from 1.9 per cent in the March 2019 quarter to 1.1 per cent in Q2 is encouraging. Positively, loans to the Indiabulls group, which amount to 0.72 per cent of IndusInd Bank’s total loans, remain standard assets for the entire banking system; this allays fears that the bank’s watch list may increase to 1.8 per cent in FY20.

However, while the bank’s asset quality pangs are settling down, it remains to be seen whether its weak growth momentum turns into a headache for it in the next two quarters. In Q2, the bank’s loan growth rate excluding microfinance loans, shrank to 13 per cent on a year-on-year basis, making it a second straight quarter of fall in the metric since the 30-35 per cent peak. While there is little evidence that growth is turning favourable for the banking sector, it assumes greater importance for IndusInd Bank, as justifying valuations — which have already halved to 2.5 times its FY21 book from a historic four times one-year forward estimates — may turn tough if it slips further on the growth aspect.

Analysts at Jefferies reduced their growth estimates for IndusInd by five per cent for FY20-FY22. Results for the December quarter, therefore, will show if the bank walks its path on asset quality and also help the Street gauge the growth prospects.