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The shares of IndusInd Bankcrashed by a massive 18.5 per cent today, in reaction to Q2 results reported after market hours on October 24. So, what spooked investors? Read on to find out.
Elephant in the room
The key factor that triggered the rout in the stock is the deterioration in asset quality. Though the headline gross NPA ratio rose marginally by 10 bps QoQ to 2.1 per cent, the asset quality deterioration in the microfinance segment (9 per cent of the loan book) was the most pronounced. Gross NPA ratio in this segment shot up by 138 bps to 6.54 per cent sequentially, and this seems to have spooked the street.
The microfinance segment has been experiencing stress lately, with rising overleveraged borrowers. The bank has been cautiously optimistic on this segment. The microfinance loan book degrew 12 per cent on a QoQ basis. The bank has one of the most granular microfinance loan books with an average outstanding loan per borrower of around ₹40,000. Borrowers who are indebted only to IndusInd Bank make 44 per cent of the microfinance book and similarly, those indebted to one other lender make 27 per cent of the book and only 9 per cent account for borrowers who are indebted to 3 lenders or more. The management reckon that the microfinance portfolio will recover in the third and the fourth quarter and have indicated to investors to watch out for disbursements going forward, which would act as a barometer of stress in the segment (higher disbursements will mean that management have enough conviction in the underwriting).
Profit decline
While advances growth of 13 per cent and deposit growth of 15 per cent on an annual basis were fine, net profit declined 39 per cent YoY. This decline is primarily attributable to the management’s decision to hike the contingent provision by ₹525 crore to ₹1,525 crore.
Even before provisions could make a dent to earnings, the pre-provisioning operating profit (PPOP) itself was down 8.5 per cent on a QoQ basis and 7.5 per cent on a YoY basis. This was driven by a sequential decline of 1 per cent in net interest income and 10 per cent in other income.
Net interest income declined largely due to faster growth in term deposits (21 per cent YoY) than CASA balances (4.6 per cent YoY) and degrowth in high-yielding loans such as microfinance (-12 per cent QoQ). A 23 per cent QoQ decline in general banking fees and a drop of 10 per cent each in cards and distribution fees (owing to change in regulatory framework) and loan processing fees (owing to lower disbursals) impacted the other income. These three income streams make around 75 per cent of total other income.
Key monitorable
The management tried to allay concerns of the investors that the additional contingent provisions were made only as a measure of prudence owing to ‘challenging operating environment’ and that they do not expect to dip into these provisions. However, the fact that the timing of these provisions coincides with ongoing stress in the microfinance segment raises eyebrows. In general, banks make counter-cyclical provisions in times of good profits. But it is not the case here. The PPOP this quarter was down 7.5 per cent and 8.5 per cent on a YoY and QoQ basis respectively. Commentary on microfinance segment from lenders such as Kotak Mahindra Bank and Fusion Microfinance’s massive ₹550 crore provisions this quarter, only raises the scepticism on the performance of this sector. Therefore, investors need to keenly watch out for indicators that signal the health of this sector, going forward.
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