IndusInd Bank sees Q3 net dip

The Hindujas-promoted IndusInd Bank's profit in the third and fourth quarters of 2005-06 is likely to fall from a year ago, said Managing Director, Bhaskar Ghose. This will be due to delays in branch expansion, reduced income from securitisation of assets, and the Rs 1 billion loan to Essar Oil that is yet to be recovered, he said.

"There will be an impact on profitability for Q3 and Q4. The profits that we anticipated will be lower than they were last year because lot of this had been dependent on the existence of the branches," Ghose said.

The bank's October-December and January-March net profit in 2004-05 was Rs 428 million and Rs 629 million, respectively. The new private sector bank was hoping to get the RBI's approval to set up another 70 branches by December. However, with the approval yet to come, the bank's business is likely to take a hit.

"The business we would have got from the branches cannot be recognised this year, it will start coming only from next year," Ghose said.

The bank was granted licence for 52 branches in the current financial year. "All these 52 branches were opened by July," Ghose said.

Currently, the bank has 131 branches. "We hope to get the licence for the 70 branches by the first quarter of 2006-07," Ghose said.

The bank lent Rs 1 billion to Essar Oil in 1999. The loan has not yet been recovered and has been shifted to corporate debt restructuring process.

Several other banks including Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, and Industrial Finance Corporation of India had lent a total of around Rs 100 billion to the company.

"It is not an NPA (non-performing asset). It is a problem account. So, it would not increase our NPAs but will affect out bottomline," Ghose said.

The corporate debt restructuring process started in 2005. "Now, the restructuring on CDR package is being crystallised and there could be some sacrifices on the account, which is going to hit our profitability," Ghose said.

The bank is shifting its credit loan book from big companies to small and medium enterprises in order to improve its yield on advances.

As a part of its retail focus, the bank is focussing on small and medium enterprises. "The rates of interest in SME side at 11-12% is better than lending to big companies," he said. Also, there are ancillary businesses that we can pick up from the SMEs,he added.

The bank's credit grew 12.38% year-on-year as on Sep. 30.

Meanwhile, the bank would continue to focus on its vehicle financing where the average yields are about 11-12%.

The bank's deposit growth has not been impressive, given the problems in expansion of branch network. Deposits grew 4.05% year-on-year as on Sep. 30. "We will probably land up with 15-16% deposit growth by the end of March," Ghose said.

The bank plans to reduce its cost of deposits. Currently, the cost of deposits is 6%. "To the extent possible we are trying not to renew the bulk deposits as and when they mature," Ghose said.

The bank would focus on increasing the volume of retail deposit. "Interest rates are not a problem. We are getting at the low rates we hoped for," he said.

The bank plans to come out with around US $100 million Tier I issue in the first quarter of the next financial year. "It is likely to be a GDR (global depositary receipt) issue," he said.

The bank has taken an approval from its general body to increase the authorised capital to Rs 4 billion from Rs 3 billion rupees. "I must emphasise that we have not frozen on any figure as yet," Ghose said.

On Tuesday, the bank's shares closed at 60.90 rupees on the NSE, up 2.70% over Monday. The bank's capital adequacy ratio is 10.80% and would need the additional capital to meet its credit demand and growth plans.

Earlier, the bank was funding its credit demand through securitisation. However, income from selling assets has dried up following its decision to exit securitisation.

IndusInd has room to raise around Rs 1.20 billion Tier II capital and intends to mop up the entire amount by March.

"We expect that interest rates will start going up. So we may as well raise the entire amount now than raise later and pay higher amount of interest rates," Ghose said.

The bank's CAR is likely to hover around 11.0% after the equity and bond issues. The bank's 31% stake is owned by the Hindujas. "Our original licensing (statement) says that 40% stake will be held by the promoters," Ghose said.

RBI in its monetary policy statement in July mentioned that no single entity will be allowed to hold more than 10% in a bank. "The RBI guidelines assured that licensing condition will be taken into account in case of deciding on the shareholding pattern in banks," Ghose said.

Ghose emphasised that the holding pattern in the bank is diversified as the promoters are not Hindujas but IndusInd International Holding (IIHL) that has 650 shareholders.

IIHL has 23.59% stake in the bank. However, although Hindujas have a substantial stake in IIHL, Ghose refused to disclose the amount of the stake.

"We have submitted the shareholding pattern in IIHL to RBI. The point we are trying to make to RBI is that IIHL as a shareholder in IndusInd Bank fulfils all the fit and proper criteria stipulated by the RBI for substantial shareholding," he said.

The norm for substantial shareholding states that the shareholding is broadly based and under the supervision of acceptable regulator, he said. "Our contention is that even IIHL is broadly based," Ghose said.

Ashok Leyland Finance (ALFL) would dilute its stake to 10% by March, following RBI's norms on shareholding. Currently, ALFL owns 13.07% stake in the bank.

The non-banking finance company merged with the bank in 2004. On whether the stake sale by Ashok Leyland will be through the market or a private placement, Ghose said, "there are option"�one is offloading in the market, other option is sell to it off as a bulk to may be an FII (foreign institutional investor.)"

The bank is open to buying out non-banking finance companies. "We have gone through an NBFC merger and there are lot of benefits to be had by merging with an NBFC," Ghose said.

The bank would prefer taking over NBFCs that are in the automobile financing space. "For us there would be synergies if we were to look at NBFCs which are also in the auto financing space," Ghose said.