IndusInd Bank Q1: Building higher provisions and retail deposits will be key

A sharp fall in loans under moratorium, sequential rise in deposits, strong capital ratios (to be further bolstered by the proposed capital raise) and healthy net interest margins... Those were the key positives in IndusInd Bank’s June quarter results. However, a significant moderation in loan growth, lower Covid provisions (than its peers), and weak traction in savings deposits indicate the pain ahead for the bank in the near term.

In the quarter to June, IndusInd Bank’s net profits fell 64 per cent owing to a sharp rise in provisions (steady increase in recent quarters). The bank’s net interest income grew 16 per cent YoY, led by a modest 2 per cent YoY growth in advances (4 per cent decline QoQ). The bank has witnessed a significant slowdown in credit growth in the past two quarters, on the back of its conscious decision to cut down on corporate exposure and re-orient its liabilities (deposits).

Also read: IndusInd Bank Q1 net profit down 68%

After the YES Bank episode, the bank had witnessed a depletion in its deposits in the March quarter (7 per cent decline QoQ) led by government and wholesale deposits. The bank is now re-orienting its focus on retail deposits. While deposits went up 5 per cent sequentially in the June quarter, a further ramping up is critical to drive sustainable credit growth in the medium to long term.

The bank’s strong capital ratios are, however, a key positive. It has approved a ₹3,288-crore capital raise through a preferential issue from promoters and other investors. This will add about 120 bps to the bank’s already strong capital adequacy ratio, taking it to 16.5 per cent.

Lingering asset quality risk

On the asset quality front, gross non-performing assets ratio (GNPA) has inched up owing to a contraction in credit. GNPA ratio stood at 2.53 per cent in the June quarter, up from 2.45 per cent in the March quarter. Slippages remained elevated at ₹1,537 crore, led by three stressed groups, a coffee group and a healthcare provider (amounting to ₹1,090 crore). Reductions in NPAs stood at about ₹1,585 crore, but this was led by write-offs of ₹1,250 crore; recovery has been meagre at ₹2 crore.

Loans under moratorium, which were about half of the bank’s loan book as of April-end, were down to 16 per cent in June (including MFI). While loans under moratorium from the corporate segment were down to 9 per cent from 22 per cent earlier, for retail it was down to 19 per cent from 75 per cent.

The high 75 per cent of retail loans under moratorium in Phase-1 suggests that a close watch may be warranted on the asset quality risk in the coming quarters. As such, at 19 per cent, retail loans under moratorium are still higher than for peers.

Against elevated asset quality risk, the bank’s provisioning buffer appears lower than its peers’. The bank has made additional Covid-related provisions to the tune of ₹920 crore during the June quarter, taking the total provisions to ₹1,203 crore. Hence, the provisioning can increase sharply in the coming quarters.

Slowdown in loan growth

IndusInd Bank has been able to deliver strong loan growth of 25-30 per cent in the past few years. The outflow of deposits during the March quarter, was a key concern. In the June quarter, the bank has managed to ramp up deposits by 5 per cent QoQ, led by term deposits and current account deposits. But savings deposits have continued to moderate. Building a strong and granular retail deposit base will be important for the bank.

In the interim, though, as the bank re-jigs its deposit base, loan growth could remain subdued. As such, the bank has been following a calibrated growth strategy — cutting down corporate exposure and increasing focus on retail assets. All of this could impact growth in the near term.