Money & Banking

Q3 comment | IndusInd Bank: Higher slippages weigh on healthy core performance

Radhika Merwin BL Research Bureau | Updated on January 14, 2020 Published on January 14, 2020

While IndusInd Bank kicked off the earnings season with healthy loan growth, strong growth in net profit and steady gross NPA ratio, it was not enough to cheer the market. Higher slippages and a slight increase in its SMA 2 book (special mention accounts where payments are overdue by 61 to 90 days) appear to have weighed on the sentiment. The stock fell nearly 4 per cent after the results were announced.

The bank’s exposure to the stressed real estate sector, still notable SMA2 book, impact of making 100 per cent provisioning towards its exposure to an HFC are factors to watch out for.

However, the bank reducing its exposure significantly to the three stressed groups in media, HFC and diversified sector, healthy margins, returns ratios, and strong capital ratios are key positives that are likely to augur well for the stock over the medium term.

What’s of concern?

At first glance, gross non-performing asset ratio, which came in at 2.18 per cent of loans in the December quarter – slightly lower than the 2.19 per cent reported in the previous September quarter – lends comfort. But there are some aspects that suggest a watch in the coming quarters.

One, additions to bad loans have moved up significantly in the past two quarters. In the latest December quarter, slippages increased to ₹1,945 crore from ₹1,102 crore in the September quarter. In the June quarter, slippages had stood at ₹725 crore. Within corporate, slippages increased to ₹1,237 crore in the December quarter, from ₹479 crore in the September quarter. Slippages include ₹282 crore pertaining to a travel company, ₹250 crore to a diversified group, and ₹177 crore to a paper company.

A substantial reduction in NPAs has offset the impact of steeper slippages, though. Reduction in NPAs stood at ₹1,119 crore in the December quarter, which includes write-offs of ₹516 crore. Hence, the sustainability of this trend will need to be seen. Recovery, though, has been notable at ₹345 crore.

Within retail, too, there have been higher additions to NPAs. For IndusInd Bank, NPAs in credit cards have been on the rise over the last two years. From 1.3 per cent in March 2017, the NPA ratio inched up to 2.57 per cent in the December 2019 quarter.

Two, the bank’s SMA book has gone up. SMA1 (where payments are overdue by 31 to 60 days) are 0.64 per cent of loans, up from 0.38 per cent of loans in the September quarter. SMA2 book increased to ₹1,407 crore in the December quarter, from ₹1,143 crore in the September quarter.

Slippages and SMA book will need a close watch in the coming quarters. The bank’s exposure to the three stressed groups in media, HFC and diversified sector stood at 1.9 per cent in March 2019 quarter.

This has reduced significantly to 0.47 per cent in the latest December quarter. While this is comforting, much of the decrease in the December quarter has been due to the bank providing 100 per cent for the exposure towards the HFC (0.3 per cent of book). While 25 per cent of this has been recognised in the December quarter, the balance has been drawn down from the reserves and will reflect in the P&L in the next three quarters.

Core performance

Notwithstanding the slowdown in credit growth within the banking sector (overall credit growth at about 7 per cent), IndusInd Bank has been able grow its loan book at a healthy 20 per cent in the December quarter. However, growth has been moderating since the June quarter.

This is the third quarter that takes into account Bharat Financial Inclusion’s results after the completion of the merger with IndusInd. The bank’s net interest margin inched up marginally by 5 bps to 4.15 per cent in the December quarter.

Published on January 14, 2020
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