IndusInd Bank: High provisioning to weigh on profits in second half too

Healthy topline growth, as well as operational parameters, are positives

Exposure to the IL&FS group had hurt the sentiment of IndusInd Bank's investors after the latter’s September 2018 quarter (Q2) results announced in October. In Q2, the bank’s net profit grew by a meagre five per cent year-on-year to Rs 9.2 billion due to doubling of provisioning to Rs 5.9 billion, of which about 47 per cent or Rs 2.8 billion was towards exposure to IL&FS.

However, analysts still believe that the provision pain is likely to continue in October 2018-March 2019 (H2FY19). And this may further weigh on near-term sentiment.

Post its interaction with IndusInd’s management, Equirus in a November 29 report, said that H2FY19 provisioning would remain elevated as the bank looks to prudentially set aside provisions towards its IL&FS exposure. IndusInd has Rs 20 billion exposure to the bankrupt IL&FS, at the parent level. Excluding the contingent provision mentioned above, this translates to over 44 per cent of IndusInd’s April-September 2018 operating profit.

Though the bank has some rights in terms of repayment with respect to the IL&FS exposure, which could entail good recoveries if the accounts get resolved, analysts believe this will take a long time.

The near-term pain thus is unlikely to wade. Analysts estimate IndusInd’s provisioning and contingencies to rise by 60-70 per cent in the second half of FY19 from Rs 9.4 billion in H1FY19. Resultantly, profit growth in the second half could be curtailed, and credit cost (bad loan provisioning as a percentage of average loan book) for entire FY19 is seen rising to 1.5 per cent from 0.9 per cent in FY18.

Another worry could be moderation in vehicle loan growth on account of lacklustre commercial vehicle sales.

Nonetheless, the bank’s operational parameters are expected to remain strong as compared to most of its peers. Overall top-line growth is expected to be good led by traction in loan book growth given the issues at non-banking financiers and some private banks. Analysts foresee a 35-38 per cent year-on-year rise in advances each in the December 2018 and March 2019 quarters, driving the bank's net interest income.