IndusInd Bank: Kathpalia's maiden attempt to quell doubts sparks concerns

As the new management looks to focus on balance sheet, growth may take a backseat

Normally, when a management addresses its investors, it is aimed at soothing their concerns. The stock price would rebound thereon. In IndusInd Bank’s case, the outcome of Sumanth Kathpalia’s (the bank’s newly elevated MD & CEO) first analyst call had a different effect.

On a day when the stock market bounced back strongly, with the Sensex rising over 3.6 per cent, IndusInd Bank's stock plunged 20 per cent in intraday trades before closing down 14.7 per cent. Divergent statements made by the bank in less than a month on key parameters — such as deposits, stressed exposure, and asset quality — haven’t been received well by investors.

During Monday’s analysts call, Kathpalia indicated there has been some run on deposits — 10–11 per cent outflow — as compared to 2 per cent stated by the management earlier in March. While this outflow was in the bulk and government deposits, it indicated that the Reserve Bank of India’s plea to state governments asking them not to withdraw money from private banks hasn’t been quite effective. Private banks, including IndusInd Bank, may be on the back foot with respect to retaining large deposits.

 

 

Likewise, from the earlier guidance of the net non-performing assets (NPA) ratio falling below 1 per cent, Monday’s interaction indicated 200–210 basis points (bps) increase in provisioning cost, which, analysts at Credit Suisse said, could translate to a 30–40 bps rise in the March quarter's NPA ratio. 

Worse though is the management stating that 45 per cent of its books represented by segments — such as loans to small and medium enterprises (SMEs) and business banking, vehicle loans, microfinance loans and some large BBB-rated corporate loans —being vulnerable to accelerated downgrades under the current macroeconomic condition. This is contrary to the management’s earlier commentary that they don’t foresee pressure from these loan assets.

“If the change in stance is much to do with the nationwide lockdown, then recovery could be extremely elongated,” said an analyst from a foreign brokerage. Therefore, analysts feel with the focus shifting to balance sheet recalibration, it is prudent that the management has sharply trimmed near-term growth estimates to 8–10 per cent.

Analysts at Emkay Global have cut their 2020-21 (FY21) and 2021-22 earnings estimates by 5 and 13 per cent, respectively, on lower loan growth and higher loan loss provisioning, and expect a moderate return on asset at 1.6-1.7 per cent.

Amid the gloomy outlook, the good news is IndusInd Bank’s stock price at 0.7 times FY21 estimated book appears to factor in these concerns. However, analysts at Credit Suisse feel that until balance-sheet growth concerns remain, the stock may continue to underperform.