IndusInd Bank: Q2 net grows just 5% as IL&FS worries spook Street

Due to contingency provision related to loans to IL&FS, Q2 net profit grew at the slowest pace of 5% in 42 quarters

IndusInd Bank, one of India’s top private sector lenders, is among the few not to disappoint the Street on the earnings front. But the September quarter (Q2) was different, thanks to IndusInd setting aside Rs 2.75 billion as contingent provision towards the beleaguered Infrastructure Leasing & Financial Services (IL&FS). Thus, net profit stood at Rs 9.2 billion, up just 5 per cent year-on-year — the weakest quarterly growth since March 2008.
 
Adding up the contingency provisioning, the total provisioning cost doubled to Rs 5.9 billion in Q2, marking the steepest acceleration in this metric in recent years. To soothe investors, the bank has indicated it does not expect to take a further hit on the account, as it is currently classified as a standard loan. Moreover, the loan being secured against steady cash flows, analysts say trouble from the IL&FS exposure could be one-off. “Even assuming another quarter of pain, I see downside risks of another Rs 2.75–3 billion,” says Rakesh Kumar of Elara Capital. However, given the stock reaction, it seems the Street is awaiting more clarity on this front.

The other niggling aspect in Q2 was further fall in profitability. Measured as net interest margin (NIM), the metric, which has been coming off from the 4 per cent peak a year ago, fell to a recent low of 3.84 per cent in Q2. Cost of deposits, which has gone up sharply from 5.9 per cent last year to 6.54 per cent, weighed on NIM.
 
This, given that yield on advances has only increased from 11.27 per cent to 11.44 per cent in Q2. Kumar is, however, hopeful that as the fresh loans (lent on fixed interest rate) mature, the bank will stand to gain.
 
Another observation in Q2 is a faster growth in its wholesale lending book at 35 per cent, compared to 29 per cent growth posted by retail book — possibly indicating a growing competition in the retail space. Nonetheless, overall loan growth at 32 per cent in Q2 (best in three years) helped IndusInd expand its net interest income by 21 per cent to Rs 22 billion, and pre-provisioning profit by 22 per cent to Rs 20 billion in Q2.
 
With operational numbers holding strong, the Q2 showing seems to be one-off. While analysts would keep a watch on provisioning and NIM, they believe any correction would offer a good entry point in the stock.