IndusInd Bank: With the balance sheet stabilising, focus shifts to growth

Street's apprehension on asset quality and ability to regain footing on deposits has been arrested

When Sumant Kathpalia took charge as CEO on March 24 last year, IndusInd Bank shares were near a decade low of Rs 302 apiece. There was much scepticism around its ability to survive the asset quality crisis and questions were raised on whether it can withstand the sudden run on its deposits, partly due to the YES Bank crisis. There was very little in Kathpalia's favour when he assumed office.
 
Considering IndusInd Bank’s stock price appreciation to Rs 993 a year later — a threefold increase in returns, much of these concerns seem to have been quenched. The most important relief is in the form of asset quality, pangs of which were first felt in the September quarter of FY19 when the IL&FS crisis unfolded. While the infrastructure major going bust left no one in the financial services space unaffected, IndusInd Bank was among the most impacted by the event, despite its exposure at a little over Rs 3,000 crore or less than 3 per cent of its loan book. Subsequently, with non-banks going through a round of crisis and later the telecom sector feeling the heat, gross non-performing assets (NPA) of the bank rose to 2.1 per cent in FY19, further rising to 2.5 per cent in FY20.
 
When Kathpalia took charge, the Covid-19 pandemic gripped the banking sector and a six-month moratorium followed. In Q2, the bank’s proforma gross NPA remained elevated at 2.3 percentage and in Q3, it rose to 2.9 per cent. This was the highest bad loans accretion the bank had seen in nine years. Credit cost at 360 basis points (bps; annualised) in FY21 was far away from its best period (FY14-FY18) average of 90 bps. The gap between proforma NPA and reported numbers was about 120 basis points, though much of the proforma pain had been well provided for.

 
Provisions as a proportion of total loans stood at 3.3 per cent in Q3, the highest among the top five private banks. Therefore, when the bank discloses its Q4 results, the deviation between actual and reported numbers can be little.
 
That said, analysts feel that credit costs may well have peaked in FY21; they anticipate normalisation in FY22. “Over the past year, IndusInd Bank has made accelerated provisions on stressed accounts leading to an increase in NPA coverage at 77 per cent (on proforma basis), versus 53 per cent a year ago,” analysts at Citi Research note. The bank has proactively downgraded corporate accounts and hence, new stress formation is likely to be low in the corporate segment, the analysts say. But, uncertainty of the fresh wave of Covid-19 on loan growth can destabilise the credit costs assumptions and the impact of this will be known soon.
 
Meanwhile, the bank’s deposit base is steadying well, after the 2 per cent year-on-year decline seen in March last year. At Rs 2.39 trillion, deposits grew 10 per cent year on year in Q3, continuing the trend seen for most of FY21.

 
With the balance sheet stabilising, the focus must move to growth, which has been quite muted in FY21 – at about two per cent year-on-year so far. While the net interest income has increased by 13 per cent year-on-year for nine months of FY21, trebling of provisioning cost has eaten into net profits, down 52 per cent year-on-year.
 
IndusInd Bank plans to focus on its stronghold — the commercial vehicles segment, where the leadership position is set to be fortified, alongside microfinance and secured retail loans. “The mid and small corporate segment is expected to grow at par with the bank’s overall growth (targeted at 15-18 per cent), while the large corporate and real estate segment is expected to grow at a slower pace,” analysts at JM Financial note. What’s also comforting is the bank’s keenness to keep the unsecured portfolio at the check — at less than 5 per cent of its book.
 
For now, despite the past year’s turbulence, the Street hasn’t lost its conviction in the IndusInd Bank stock. Promoters’ commitment to remain invested in the bank adds to investors’ morale. At 1.5x FY22 book, the stock trades 45 per cent lower than its 5-year average valuation, despite the rally since March 2020 lows, thus remaining an attractive pick in the banking space. However, for the interest to sustain, IndusInd Bank should deliver on the growth front, which will be tested in FY22.