IndusInd Bank likely to continue underperforming industry peers

Valuations reasonable but analysts have raised questions on bank's asset quality performance

It’s been nearly six months since the IL&FS saga unfolded, in October last year. However, the bitter impact of the fiasco is still lingering on IndusInd Bank. The bank’s stock is trading 19 per cent lower than its October levels, and analysts expect it to remain under pressure for a while. 

First, the quantum of exposure that totals Rs 3,000 crore — less than 3 per cent of the bank’s total loan asset as on December 31, 2018 (Q3) — isn’t demanding. 

Further, the loan remains a standard account for IndusInd Bank, and the provisioning is more a prudent step to maintain asset quality rather than a regulatory requirement. Yet, the impact is similar to a mere stone thrown into a pond. Provision costs for the first nine months of FY19 were nearly 84 per cent higher than the year-ago level, and the bank has significantly reduced its provision coverage ratio from about 60 per cent three quarters back to less than 50 per cent in Q3, indicating that the possible bad loan pain wasn’t fully absorbed in. 

The March quarter is likely to witness further provisioning of 20-30 per cent of the loan amount — in addition to the already provided Rs 600 crore towards IL&FS loans — thus keeping provisions elevated for another quarter or so. 

Even if this takes care of the exposure to IL&FS — the holding company (Rs 2,000 crore) — possible loan losses towards IL&FS subsidiaries is a black box. As against the earlier assumption that Rs 1,000 crore lent to IL&FS’ special purpose vehicles (SPVs) — backed by cash flows — may not require provisioning, the narrative has changed after the Q3 results. Setting aside for SPVs’ possible loan losses appears inevitable in Q4, and this hasn’t gone down well with analysts.  

“The strength of IndusInd Bank was its asset quality. The IL&FS exposure raises questions on the bank’s corporate loan book, and whether the rapid growth has come at the cost of asset quality,” says Siddharth Purohit of SMC Capital. This is why he says the stock may continue to underperform peers, until the dust settles. 

Jefferies has also reduced its FY19 earnings estimates by 15.5 per cent on account of higher credit costs, following the IL&FS exposure. 

Valuations, however, favour the stock that is trading at 2.9 times its FY20 estimated book. Majority of analysts polled on Bloomberg have maintained a ‘buy’ recommendation. However, if the IL&FS issue extends beyond Q4, the stance may change.