Investor in IndusInd Bank? Know what is plaguing the stock and what lies ahead

Amid the market mayhem over the past month, IndusInd Bank has particularly taken a hard knock, losing over 60 per cent in value. While it is becoming evident that banking sector will face the brunt of the Covid-19 impact on the economy, investors appear to have been particularly unkind to some bank and NBFC stocks.

For IndusInd Bank, the fallout of the YES Bank crisis rubbing off on depositor sentiment, possible rise in delinquencies and significant moderation in loan growth owing to the pandemic outbreak have been weighing on the stock. In a concall with investors recently, the management stated that there was a 10-11 per cent fall in deposits and that there were signs of disruption in many of the loan segments due to the lockdown. Until normalcy returns, uncertainty in the business is likely to continue.

The new MD & CEO Sumant Kathpalia has also laid down a strategy to focus on retailisation of assets (loans) and liabilities (deposits). Re-orienting the balance sheet and calibrated growth in the medium term will weigh on the bank’s earnings in the near term.

Significant slowdown in loan growth

Notwithstanding the sluggishness in credit growth within the banking sector over the last two or three years, IndusInd Bank was able to retain strong loan growth of 25-30 per cent until recently. In fact, the bank’s credit-deposit ratio has been high, at over 80-85 per cent. The outflow of deposits as stated by the management is hence a key dampener to growth.

Of the 10-11 per cent fall in deposits, two-thirds has been due to government related accounts. There has also been a fall in wholesale deposits, while the retail deposit reduction has been the least. The bank has replaced the outflow of these deposits by CDs and borrowings (including forex borrowings and dipping into excess SLR under repo). This could lead to higher cost of funds in the near term.

Given that the bank now proposes to reorient its liabilities (deposits) and focus on retail deposits, there could be pain in the near term. Building retail deposits will be a long-drawn process and loan growth will moderate significantly. The management has also stated that it will follow a calibrated growth strategy, cut down corporate exposure and increase focus on retail assets.

With the bank’s balance sheet growth to moderate, earnings could come under notable pressure. If the lockdown situation worsens, there could be more pain for investors in the coming months.

What will be also critical is the pace of deterioration in asset quality due to the pandemic.

Stress in various businesses

The management, in its concall, indicated signs of disruption and stress in some of its businesses owing to the lockdown. While the RBI’s three-month moratorium should help to some extent, the pace of delinquencies could accelerate if the situation worsens. On a baseline assumption the management expects three months of disruption.

In its MFI portfolio which is 10 per cent of loans, collections are currently hit. The management expects it to bounce back as normalcy returns. But how long this takes is difficult to gauge.

On the credit cards/ personal loans front (5 per cent of loans), the management expects elevation in delinquency. It is important to note here that the NPAs in credit cards has been on the rise over the last two years for IndusInd. From 1.3 per cent in March 2017, the NPA ratio inched up to 2.57 per cent in the December 2019 quarter.

Of the bank’s commercial vehicle portfolio (12 per cent of loans), more than 90 per cent are small transport operators customers. The management stated that the moratorium should help and the segment can bounce back rapidly. But this, given the ongoing uncertainty around Covid-19, may be a bit optimistic. The passenger vehicle and two-wheeler user segments largely comprise self-employed people, and are semi-urban and rural focussed.

In business banking (6 per cent of loans) the management stated that it has a granular portfolio and that less than 8 per cent of the portfolio is in Covid-impacted sectors such as retail and travel. In real estate (4 per cent of loans), the management stated that some projects delays are likely but regulatory interventions should help. But even so, there could be notable stress in this portfolio in the coming quarters.

Aside from the Covid-led risks, the existing stress in the bank’s corporate portfolio needs a watch.

In the December quarter there was a notable rise in slippages (to ₹1,945 crore from ₹1,102 crore in September). There was an increase in the bank’s SMA book, too. SMA1 (where payments are overdue by 31-60 days) stood at 0.64 per cent of loans in the December quarter, up from 0.38 per cent in the September quarter.

Increasing provisions

The management stated that it would look to increase its provision cover to 60 per cent in the March quarter from 53 per cent in the December quarter. Maintaining a high threshold of capital with capital adequacy at 15 per cent (14 per cent in the December quarter), will also be the management’s priority. While cheap valuations (about 0.8 times price to book), and healthy capital base are positives, heightened uncertainty over evolving risks on account of the Covid-led impact can keep the stock under pressure.