IndusInd Bank: Investors need to be watchful despite strong June quarter

Numbers were aided by BFIL merger and largely met expectations, but some asset quality stress visible in select segments

Putting to rest fears about another period of elevated asset quality pain, the June quarter (Q1) turned out rather smooth for IndusInd Bank. 

Being the first quarter after its merger with Bharat Financial Inclusion (BFIL) — India’s leading micro finance lender — it helped IndusInd in many ways. 

For one, the 34 per cent consolidated growth rate in net interest income (NII) was quite robust and matched estimates. The high-yielding assets of BFIL also spruced up IndusInd’s net interest margin (NIM; a profitability measure) back to the 4-per-cent mark after over a year. Thus, net profit grew 38 per cent year-on-year (YoY) to Rs 1,433 crore. 

On a standalone basis, however, the 14 per cent YoY growth in NII and 18 per cent net profit growth seem to lag the historic trend of 20-25 per cent growth. The breather for investors came in the form of improvement in asset quality. 

The gross non-performing assets (NPA) ratio stabilised at 2.15 per cent, up only 5 basis points (bps) sequentially. The absolute NPA provisioning, however, declined 72 per cent compared to the March quarter, at Rs 431 crore in Q1FY20. 

The bank’s reiteration of its stand on the troubled loan accounts (including IL&FS) that further provisioning may not be necessary, came as a relief. Another positive is that cost of funds haven’t increased significantly. At 5.94 per cent, it is only a marginal increase sequentially. 

Overall, analysts say the Q1 numbers suggest the bank is comfortably positioned on key parameters. “The bank has walked its talk on asset quality,” says Siddhart Purohit of SMC Capital. 

However, that doesn’t mean things are crystal clear. First, while the bank’s commercial vehicles loans grew 20 per cent YoY, it was a bit disappointing, given the historical Q1 trend of 25-30 per cent growth. 

Second, with 40-50 bps increase in the gross NPA ratio for commercial vehicle loans, credit cards, and loan against property (about a fourth of the loan book), one needs to be wary of tentative stress building in these pockets.

Third, it may be prudent to keep a tab on BFIL’s loan growth too. In Q1, for instance, BFIL’s disbursals shrunk 2 per cent, even as its loan book grew 26 per cent, indicating the management’s caution in terms of loan growth. 

While part of it may be to avoid the concentration risk visible in Odisha, whether the trend persists for long or not, needs to be seen. 

Further, though down from 1.9 per cent, the watch list (loans with potential stress) still stands at 1.67 per cent of its total loans.

Not surprisingly then, that the stock slipped about 2 per cent of Friday. 

However, given the underperformance in past few months, analysts say valuations (2.5x FY20 estimates) are now favourable for long-term investors.