Ghost of IL&FS continues to haunt IndusInd Bank; stock takes a hit

Margins may stay strong, but Street will keep eye on asset quality

The December quarter (Q3) results have turned out to be unfavourable for private lender IndusInd Bank. 

The lender failed to buck the trend of recording a fall in share price after the results, seen for four quarters now. The stock fell 3.85 per cent after the results, consequently erasing the marginal gains it had registered over the past year.

Much like the story of Vikram-Betaal, the ghost of IL&FS continues to haunt the lender. With Rs 250 crore provided for its exposure to IL&FS, the bank has set aside for 75 per cent of its Rs 3,000-crore exposure to the company as bad loans. 

In Q3, it also provided Rs 240 crore towards a housing financier facing fraud and insolvency proceedings. 

Consequently, provisioning cost touched Rs 1,044 crore, up 72 per cent year-on-year (YoY). Yet, its non-performing asset ratios almost doubled. Gross NPA at 2.18 per cent was higher than the 1.13 per cent last year, and net NPA ratio at 1.05 per cent was up from 0.59 per cent a year ago, which spooked investors. 

More importantly, slippages (loans turning bad) at Rs 1,237 crore (up nearly 3x YoY) for a travel company, a diversified conglomerate, and a paper company indicate that trouble from new quarters remains unpredictable.

Further, while IndusInd Bank has been off its 25-per-cent-growth mode for a while, Q3’s 20 per cent YoY growth was even worse than recent quarters.

While the bank doesn’t provide segmental growth data, much of the uptick seems to have been triggered by its newly acquired microfinance business. 

This has led to the consumer loans segment growing 65 per cent YoY, and has made good for the compression in its corporate book that declined by 9.4 per cent YoY to Rs 95,253 crore. 

On a sequential basis, though, corporate loans grew at 6 per cent, while retail loans grew at a slower pace of 4 per cent.  

The management commentary in the near-term wasn’t encouraging and investors, hence, may have to be content with a sub-25 per cent growth rate for a while. 

The comforting point, however, is that the microfinance business-led growth has helped IndusInd Bank improve its profitability or net interest margin (NIM) to 4.15 per cent, up 5 basis points (bps) sequentially in Q3. 

The decline in cost of deposits by 21 bps has helped the bank compensate for the 7 per cent sequential fall in yield on advances. 

While analysts expect NIMs to remain healthy, they have said that getting back on track with respect to asset quality is more critical.