IndusInd restores itself back to health

Private sector lender IndusInd Bank has come a long way since the current managing director and chief executive, Romesh Sobti, took charge five years ago in 2008. At that time, the bank was struggling with seriously impaired earnings and poor asset quality. Sobti and his team took a five-year approach to restore the bank's health. During this time, their focus was on re-organising the bank, streamlining its businesses, restructuring the balance sheet, adding fresh talent and recapitalising it.

The bank also embarked on an aggressive loan recovery plan, besides refurbishing branch network and withdrawing lending discretion from the branches as part of risk management. The turnaround is clearly visible in key operational metrics such as return ratios (return on assets and return on equity), net interest margins, asset quality ratios and revenue per employee (see table). The improvement has rubbed off on the bank's share price as well. From Rs 78 per share in April 2008 the stock's current price has zoomed to Rs 502 apiece. It has outperformed both the Sensex and the Bankex indices since August 2009.

The current share price of the bank is about three times the estimated FY14 book value, which is on the higher side when compared to its peers as well as its historical valuations. Analysts say these valuations appear to be justified, given the bank's strong growth prospects. "While IndusInd Bank's valuations are at a premium to those of peers, we expect this to sustain considering strong earnings visibility and robust asset quality of the bank," says Ishank Kumar, banking analyst at Religare Capital Markets.

Apart from the broader restructuring exercise, the new management has also put in place strong processes and risk management systems. Increasing the pie of its retail secured book and low-risk working capital loans for companies was another focus area. As a result, its gross non-performing assets (NPA) and net NPA ratios have fallen drastically. They are at 1.03 per cent and 0.3 per cent of total loan book, respectively, from about 3 per cent and 2.27 per cent five years ago. To strengthen its position further, the bank has entered a host of new products and services to cater to its corporate as well as retail customers. The new services include forex products, loan against property, gold loans and credit cards, among others. In addition to adding new customers in these segments, the bank also plans to cross-sell these products to existing customers.

IndusInd Bank has also increased its deposits market share, pushing the low-cost current account and savings account (CASA) ratio to 29.3 per cent as against 15.7 per cent in FY08. While this metric is better than similar-sized peers such as Yes Bank (19 per cent CASA), it is still far behind that of HDFC Bank, ICICI Bank and Axis Bank, all of whom have a ratio of over 40 per cent.

Sobti and his team are now working on a plan to fuel the next phase of growth for the bank. The aim is to scale up the number of branches without compromising on profitability. The bank has already doubled its branch network to 500 from FY'08 and it now plans to scale it up to 1,000 by FY16. "We plan to bring scale to our businesses by increasing our branch network and the customer base. Scale with profitability is what we are looking at," says Sobti.

Going forward, analysts expect the bank's loan growth to remain robust at 25-26 per cent levels, in line with the growth trend of the past three years. The bank's earnings are expected to grow at a compounded rate of 26 per cent over FY13 to FY15, driven by strong loan growth.

However, some challenges still remain. For one, weakness in the commercial vehicle segment which accounts for 22 per cent of the total loan book could put a strain on its finances. Besides, with the bank looking to expand its loan book aggressively, analysts say NPAs could rise marginally in the future.

"We are assuming that IndusInd Bank's gross/net NPAs will rise to 1.2/0.45 per cent by FY18 as it expands its book, but will remain significantly lower versus the sector. We do, however, expect management to make adequate provisions and keep NPA ratios down", says Tabassum Inamdar, banking analyst at Goldman Sachs.

There are other concerns as well. Unlike its larger peers, IndusInd Bank does not have a strong brand franchise, absence of which could hinder deposit growth. The bank is working on changing this. "We are increasing our brand spend ten-fold to create awareness and visibility amongst our existing base of 3.5 million customers," says Sobti. Also, setting up of new banks (mostly by large industrial houses having deep pockets) in the days to come will intensify competition in the sector.