A cursory reading of IndusInd Bank’s September quarter (Q2) results seems uninspiring. Net interest income or NII grew by 13 per cent year-on-year (down one per cent sequentially) and net profit fell by whopping 53 per cent over last year. These numbers were below the Street’s estimates.
However, the positive aspect is the bank’s improving asset quality. Gross non-performing assets (NPA) ratio increased by only two basis points (bps) year-on-year to 2.21 per cent – the slowest NPA accretion rate so far. Without the Supreme Court’s standstill it would have risen by 12 basis points year-on-year to 2.31 per cent, still better that past performance. Net NPA ratio easing to 0.52 per cent from 1.12 per cent a year-ago and also below FY20’s 0.91 per cent reiterates an improvement in asset quality trend. Much of it may be attributed to the bank’s recent practice of recognising the asset quality pain upfront. Provisioning cost rose by 166 per cent year-on-year to Rs 1,964 crore in Q2.
Does this indicate that the worst is behind IndusInd Bank? Perhaps not. Of the total Rs 399 crore of gross slippages (loans turning bad), only Rs 13 crore came from corporate book - lowest in many years and may be a one-off. “We are in the process of identifying loan accounts for restructuring,” said Sumant Kathpalia, MD & CEO, IndusInd Bank. He expects the restructured book to be in single low-digit, but guides that the likelihood of lumpy bad loan accrual is less likely going ahead. The retail book, on the other hand, witnessed pain from across the board and the management feels it would be tough to estimate retail slippages.
The interesting part though was Kathpalia’s shift in focus from balance sheet realignment to scaling of business, nearly two quarters after assuming charge. The bank aims at fortifying market share in the vehicle finance space and improving its visibility in other products. That said, the management has refrained from giving any credit growth guidance for FY21, which is comforting as it suggests that the bank may not chase growth at the cost of quality.
On the whole, analysts say, IndusInd Bank’s performance on bad loans front appears convincing. “The worst periods of FY19 and FY20 may not repeat and bad loans seem taken care of,” said an analyst from a foreign brokerage. However, even as the stock has underperformed the Nifty Bank index by 60 per cent year-to-date in 2020, the analyst feels that it may remain a laggard in the near-term. And, a full-blown recovery in the stock may take a while.