IndusInd Bank: Strong show in tough times

The bank tapped into rising footfall to boost cross-selling

The December quarter was full of sudden pressures as well as opportunities thrown up by demonetisation. Banks, in particular, were expected to witness heightened pressure on their financial performance as they had to contend with a surge in deposits. IndusInd Bank, the first bank to announce third-quarter numbers, though put these concerns to rest and continued to post healthy loan growth, margins and asset quality. Its net profit grew 29 per cent, year on year, to Rs 751 crore and was slightly above the Bloomberg consensus estimate of Rs 725 crore. Loan growth, too, was robust at 25 per cent, driven by a healthy momentum in retail loans.

While the bank witnessed some fall in enquiries for new loans in the commercial vehicle segment, this trend reversed, enabling it to expand its vehicle finance book by 21 per cent. The bank gained market share in loan segments for tractors, cars, commercial vehicles, construction equipment and three-wheelers. Its share in the two-wheeler segment was flat with a downward tilt. 

IndusInd witnessed some positive fallouts from demonetisation and it will be interesting to see if its rivals did so too. For instance, it tapped into the higher number of footfall in its branches by pushing distribution of mutual funds and insurance products. This led to a 44 per cent rise in its distribution fees, fuelling a healthy 22 per cent growth in fee income to Rs 885 crore. The bank’s credit card swipes doubled even as debit card spending and mobile transactions increased sharply during the quarter. New customer acquisitions multiplied 1.7 times to 133,000 in December. IndusInd Bank accumulated Rs 11,400 crore deposits in notes of Rs 500 and Rs 1,000 post note ban.

Despite a surge in operating and employee costs during the quarter, IndusInd Bank managed to improve its net interest margin to 4 per cent. The bank’s management remains confident of maintaining this metric given that 70 per cent of its loans are at fixed rates. IndusInd Bank’s margins will be resilient in the current environment of falling interest rates. With the fall in yields on advances lower than that of the cost of funds, IndusInd Bank’s net interest income grew at a robust clip.

Amid rising concerns over loans turning bad or due to the cash crunch, IndusInd Bank’s gross NPAs ratio was stable at 0.94 per cent. The bank witnessed an improvement in delinquencies as several customers used old currency notes to prepay loans. Slippages stood at 1.1 per cent, the same as the previous quarter. Its credit costs remained at 50 basis points for the third quarter in a row and it now expects to do better than its forecast credit cost of 60 basis points. About half of the CASA growth of 37 per cent during the quarter was on account of demonetisation. The bank is looking to retain the incremental deposits by stepping up efforts to cross-sell mutual funds, insurance and lockers.

Against this backdrop, it is not surprising most brokerages are bullish on the IndusInd Bank scrip. At current levels it trades at three times 2017-18 estimated book value, slightly higher than its historical average one-year forward price-to-book ratio of 2.2. While the valuation is on the higher side, it appears sustainable given the continued strength of IndusInd’s financial performance, well-capitalised book and robust return ratios.