IndusInd Bank, which was the market darling not long ago for its fast-paced earnings and loan growth, has been facing challenges over the past two to three quarters. In the recent September quarter, too, while sequential rise in deposits and strong capital ratioswere positives, a sustainable earnings growth hinges on the bank’s ability to scale up loan growth significantly in the second half and increase traction in low-cost savings deposits. As such, a likely rise in provisions can weigh on earnings if asset quality deteriorates in the coming quarters.

In the September quarter, IndusInd Bank delivered a53 per cent y-o-y fall in net profit, led by sharp rise in provisions (steady increase in recent quarters). The bank’s net interest income grew by 13 per cent y-o-y, led by a modest 2 per cent y-o-y growth in advances (2 per cent increase q-o-q). With the bank consciously cutting down corporate exposure and re-orienting its liabilities (deposits), there has been a significant slowdown in credit growth in the past two to three quarters.

IndusInd Bank, as a fallout of the YES Bank episode, had witnessed run down in deposits in the March quarter (7 per cent decline q-o-q), led by government and wholesale deposits. Since then the bank has been focussing on re-building its deposits with focus on retail deposits. Deposits have been increasing in the past two quarters (June and September), which is a heartening trend. After the 5 per cent sequential growth in deposits in the June quarter, deposits have grown further by 8 per cent q-o-q in the September quarter. But the growth has been led by current account deposits. While savings deposits have moved up in the September quarter (to ₹57,000 crore) after a trough in the June quarter, it is still below the ₹64,800-crore mark seen in the December 2019 quarter. Hence, steady ramp-up in retail deposits will be imperative to drive sustainable credit growth in the medium to long term.

The bank’s strong capital ratios are, however, a key positive. Post the ₹3,288-crore capital raise, the bank’s Tier 1 capital ratio stood at 15.8 per cent in the September quarter. This can help fund growth and act as a buffer in the event of a significant rise in provisions in the coming quarters.

Persisting asset quality risk

On the asset quality front, gross non-performing assets ratio (GNPA) stood at 2.2 per cent in the September quarter, (2.3 per cent in the absence of the asset classification standstill). Accounts where asset classification benefit was extended stood at ₹4,419 crore. The bank has made additional Covid-related provisions to the tune of ₹952 crore (total provisions ₹2,155 crore). Provisioning requirement can increase sizeably in the coming quarters, weighing on earnings.

Loan growth key

IndusInd Bank has been able to deliver strong loan growth of 25-30 per cent in the past few years. The outflow of deposits during the March quarterwas a key concern. Building a strong and granular retail deposit base will be important for the bank. While the management expects loan growth to pick up in the second half, led by MFI, tractor loans, and vehicle loans, how far the bank is able to ramp up growth, particularly in retail assets, needs to be seen.

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