IndusInd: NPAs inching up but in safe zone

While gross NPA ratio touches 0.91% in the June quarter, strong earnings growth provides comfort

It was yet another steady quarter for IndusInd Bank as net interest income (NII) grew 38 per cent year-on-year (y-o-y) to Rs 1,356 crore in the June quarter (Q1). Net interest margin (NIM), too, expanded to 3.97 per cent, from 3.68 per cent a year ago. Consequently, net profit increased to Rs 661 crore (up 26 per cent y-o-y), ahead of the Bloomberg estimates of Rs 653 crore.

However, the Street’s reaction to IndusInd Bank’s results was rather muted. Though the stock scaled to an all-time high during  Monday’s trade, it closed 0.25 per cent lower, even as the Sensex was up 1.84 per cent. This is because the level of non-performing assets (NPAs) and provisions towards bad loans continue to remain in an upward trajectory. Provision for bad  loans in Q1 stood at Rs 230 crore (up 87 per cent y-o-y), while gross NPA increased to Rs 860 crore in Q1, from Rs 570 crore a year ago.

Consequently, gross NPA as a percentage of total advances (or gross NPA ratio) inched up to 0.91 per cent from 0.79 per cent a year ago. A reading of numbers indicates higher stress coming from retail loans with gross NPA ratio in pockets, such as two-wheelers and credit cards touching 3.15 per cent and 1.73 per cent, respectively, in the July quarter.

But, are these signs of caution yet? Clearly not, affirms Ravi Shenoy of Motilal Oswal Securities. “Given the scale of operations and steady growth the bank has been displaying, asset quality is not alarming”, Shenoy adds. Other analysts largely agree with Shenoy and feel that as long as loan growth, NII, and NIMs are at comfortable levels, higher provisioning should not be a concern. The total loan growth in Q1 was 30 per cent y-o-y (Rs 93,678 crore as on June 30, 2016), with retail finance growth remaining robust at 29 per cent, while the corporate loan book grew 30 per cent y-o-y in Q1.

Demand signals firming up for commercial and passenger vehicles is a major positive for IndusInd Bank, which draws 31 per cent of its total loan book from these portfolios. The management’s aggressive plans to increase the share of retail loans from the current 45 per cent level to 50 per cent by the end of FY17 should further boost earnings and strengthen its return on equity as well (currently at 15.05 per cent).

Currently, the stock is valued at 3.34 times the FY17 price-to-book value, which, analysts say, is justified, given its superior return profile.