IndusInd Bank dips 8% to hit 3-week low after UBS downgrades scrip to sell

The brokerage firm lowered its price target to Rs 1,400, drawing inference from the lending cost of the bank, which it believes, could rise to 150 bps in FY20

Shares of IndusInd Bank hit three-week low of Rs 1,441 per share, slipping 8 per cent intra-day on Thursday after foreign brokerage UBS downgraded the stock to ‘sell’ from ‘neutral’ on expectations of higher credit costs. 

The brokerage firm also lowered its price target to Rs 1,400, drawing inference from the lending cost of the bank, which it believes, could rise to 150 basis points (bps) as against the lender's guidance of 65 bps in FY20. 

"The private lender’s lending to non-investment grade (NIG) rated companies is relatively higher than earlier expectations. Moreover, retail deposits, as a percentage of external liabilities for the bank, is around 20 per cent which is the lowest among the banks in our coverage. It is a structural issue and often manifests in credit quality surprises," the brokerage firm said in its report.

It expects the proposed Bharat Financial Inclusion merger to boost the bank's profit before tax (PBT) by 25 per cent and earings per share (EPS) by 8.5 per cent in FY20. 

"Microfinancing on a banking platform is highly profitable and is likely to yield higher returns than those in an NBFC model for several reasons. However, current credit costs of microfinancing are below the cycle average and do not fully reflect the risks from this unsecured lending business," the report said.

The stock of Bharat Financial Inclusion, too, slipped 8 per cent to Rs 911 apiece on the BSE in the intra-day trade. In comparison, the benchmark S&P BSE Sensex was down 0.66 per cent at 39,493 points at 11:55 am.