Nearly a month after IndusInd Bank’s management disclosed a fall in its deposits (a fallout of the YES Bank crisis) and indicated signs of disruption in many of its business segments owing to the lockdown, the bank reported its March quarter results broadly in line with most expectations.

Significant moderation in loan growth, rise in slippages and write-offs, sharp increase in provisioning, run-down in deposits and steep fall in return ratios (return on equity and return on assets) were the key highlights of the March quarter earnings. Though not a heartening trend, investors are possibly drawing some comfort from the fact that much of this was expected and already priced into the stock.

The once-fancied private sector bank has lost an eye-watering 66 per cent in value over the past three months, with much of the fall happening since the beginning of March. The stock is currently trading at a cheap 0.7 times one year forward price to book.

While valuations do offer some comfort, uncertainty in the business is likely to continue as there is still lack of clarity over the lockdown. The pace of delinquencies could accelerate if the situation worsens. Also, for IndusInd Bank, the fall in deposits is a big dampener to its credit growth.

Rise in GNPAs

In the March quarter, IndusInd Bank has seen a rise in GNPA ratio to 2.45 per cent (from 2.18 per cent in the December quarter). The slippages, at ₹2,058 crore, were led by certain stressed groups — a power/paper group, a tea group, a medical equipment group and a broking company — amounting to ₹1,184 crore. There was also increased stress in the commercial vehicle and MFI loan book (30-40 bps jump in GNPA ratio from December quarter).

But despite the notable slippages, bad loans were capped at ₹5,147 crore (₹4,578 crore in the December quarter), owing to substantial reduction in NPAs. While optically this may offer comfort, it is important to note that the reduction has been driven by write-offs of ₹843 crore; recovery has been meagre at ₹5 crore.

Given the evolving risks and uncertainty owing to the pandemic, deterioration in asset quality is almost a given, not only for IndusInd but for other banks as well. Hence, provisioning could remain elevated for the bank in the coming quarters.

Also, while the management indicated that the moratorium requests were low as of now and most borrowers continued to service their loans, this could change in the month ahead, as businesses face increased challenges and job losses shoot up. For now, the bank has made provision of ₹23 crore for the March quarter towards accounts where the moratorium and asset classification standstill have been extended.

The bank has also made ₹260-crore floating provision to provide some buffer for Covid-19 impact. As stated earlier, the bank has also increased its provision cover to 63 per cent in the March quarter from 53 per cent in the December quarter, which lends some comfort.

Significant slowdown in loan growth

The biggest draw for investors in IndusInd Bank over the past few years has been the bank’s ability to deliver strong loan growth of 25-30 per cent. Consequently, its credit-deposit ratio has been high at over 80-85 per cent.

The outflow of deposits during the March quarter is a key dampener to growth going ahead. The bank’s deposits have fallen by 7 per cent sequentially led by government related accounts and wholesale deposits. The loan growth in the March quarter has slipped notably to 11 per cent YoY and can remain around those levels or even lower in the near term, as the bank reorients its liabilities (deposits).

Building retail deposits will be a long-drawn process and loan growth would remain under pressure in the near term. The management following a calibrated growth strategy and cutting down corporate exposure would also impact loan growth.

High cost of funds, low loan growth and higher provisioning for bad loans could continue to weigh on earnings that have already taken a significant hit during the quarter. The return on assets slipped to 0.4 per cent in the March quarter from 1.8 per cent in the December quarter.

While the stock’s recent fall has already priced in much of the near-term risks, how the bank tides over Covid-led disruptions in the months ahead needs to be seen. Though the valuation is cheap, downside risks persist, as earnings estimate could be revised lower again if business conditions worsen.

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