IndusInd Bank faced with crisis of confidence over asset quality

While management has stuck to its earlier guidance, some analysts believe the stressed assets number to be higher

Hit by new concerns, the IndusInd Bank stock has shed 20 per cent over the last three months. What started with its exposure to Infrastructure Leasing & Financial Services (IL&FS) is getting extended to Essel Group, Anil Ambani-led Reliance group, and now to Dewan Housing Finance.
 
“When something goes wrong, markets tend to presume everything is wrong,” says an analyst with a domestic brokerage, explaining why a select few among the analyst community feel the stress may remain high for the bank.
 
UBS Securities last week pegged IndusInd’s non-investment grade exposure to top 10 leveraged group companies at 2.9 per cent, while those at Credit Suisse earlier estimated IndusInd Bank’s exposure to the above-mentioned names at about 4 per cent of the total loan book. The bank, on its part though, remains committed to its earlier guidance on these names at 1.9 per cent of total loans.
 
A large part the Street’s apprehension may be attributed to IndusInd’s 3.9-4.4 per cent exposure to real estate and non-banking financial companies. To be fair, the bank states that divergence with brokerage versions could result from the use of old data picked up from the Registrar of Companies, whereas loan outstanding is lower today through repayments, or duplicated amounts arising from multiple filings for a single loan exposure.
 
That said, even the 1.9 per cent exposure spells trouble, as that works out to Rs 3,500 crore of loans which could potentially turn bad. While the IL&FS nearly doubled IndusInd Bank’s gross non-performing assets to 2.1 per cent in 2018-19, fresh pain may increase this number in 2019-20.
 
Therefore, the next couple of quarters will be critical to gauge investor sentiment for the stock. The bank will also be incorporating Bharat Financial Inclusion’s numbers. As the share of retail assets increase to 57 per cent, from 52 per cent, the merger is expected to have a positive bearing on the cost of funds and net interest margin as well. 
 

Analysts at Morgan Stanley say with valuations 12 per cent below long-term average, if IndusInd Bank’s management executes according to its guidance, 20 per cent upside to earnings is quite likely. This, in turn, could drive rerating in the stock, they add. Whether the bank delivers the goods will be known in a few weeks.