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The private sector banking space is going through interesting times.
If one bank is working hard on consolidation post the mega-merger, there is a new CEO at the helm in another who hasn’t laid it down yet on the way ahead for the bank. For a few more, there is a looming question of what next from hereon.
Amidst these questions and concerns is IndusInd Bank, which comes across as a relatively safer bet with reasonable visibility on the way ahead, whether in terms of growth, quality of growth or quality of earnings.
At bl.portfolio, we have had a constructive view on the bank for over a year. In end-January 2023, when its valuations were around 1.6x one-year forward price to book, we had recommended ‘buy’ on the stock. Despite 28 per cent appreciation in stock price since our earlier recommendation, the fundamentals supporting the bank remain strong and, in fact, may have even marginally improved. Hence, we continue to maintain a positive stance on IndusInd Bank stock.
At ₹1,527 a share, trading at 1.8 one year forward price to book, the bank is an attractive pick in the private banking space and investors can consider taking fresh positions in the stock with 3 -5 year investment horizon.
Improved financials
One of the key elements binding the positive view on the stock is the convincing comeback in financials and return ratios. IndusInd Bank has had three bad patches — the period between September 2018 and March 2019 which is the peak of IL&FS crisis, around March 2020, when YES Bank was placed under moratorium and subsequently in November 2021 following the whistleblower charges on its microfinance operations. FY21 was a deep cleaning period for the bank, especially with new CEO on board and some parts of the clean-up continued through FY22 as well.
In FY23, IndusInd Bank bounced back in full force and in an all-round manner (see table). This performance has been sustained so far in FY24.
Planning cycle from FY23–FY26 has guided for growth at 18–23 per cent, improving the retail loan mix to 55–60 per cent and maintaining pre-provisioning operating profit to loans ratio at 5.25–5.75 per cent. Considering the performance of the last 4-6 quarters, sustaining this momentum and achieving this strategy shouldn’t be a difficult task.
Diverse book
Often the criticism with IndusInd Bank is that it is too commercial-vehicle and MFI-heavy. While MFI will remain an important piece of the overall loan book at 10 per cent, the granularity which the bank is bringing in its vehicles business by increasing focus on mid-sized to light CVs, cars including used cars and two-wheelers, should alleviate concerns over time. This strategy would not only foolproof the bank from market vagaries but would also ensure maintaining an assured bandwidth of profitability.
IndusInd Bank closed Q3 FY24 at 4.3 per cent NIM and has guided for 4.2–4.4 per cent in the medium term. In comparison to peers such as Kotak Mahindra Bank, RBL Bank and IDFC First Bank (5-6 per cent), while IndusInd Bank’s NIM may seem smaller, investors should be reassured because this guidance is after factoring for a prudential stance on other unsecured loans (expected to be capped at 5 per cent), excluding MFI loans.
Share of unsecured loans in the aforementioned banks is much higher at over 15–60 per cent.
Other plus factors
IndusInd Bank has undergone a change in philosophy. From being purely aggressive on growth (which was important in its initial turnaround years of 2008–2018 to put the bank on the map), the current stance is to capitalise on pockets where it has a right to win.
What this means is that the bank will not prefer to be among a crowded consortium of lenders to a large group or project just for visibility’s sake. Unless the bank has command over its exposure, including pricing power, such a loan proposition may be a no-deal.
Likewise, from CVs being the mainstay in the retail segment earlier, the focus is moving towards vehicle financing where CVs would be a part of the overall portfolio. Even on the liabilities side, the bank is clear that deposits should feed loan growth, which is a departure from its earlier strategy of relying on wholesale funding.
This renewed approach is ensuring that growth is granular, holistic and sticky.
Risks
With the MFI space evolving faster than it did a decade ago, how the bank will keep pace with competition without compromising on quality will be a key monitorable. The other risk is the management continuity. Sumant Kathpalia has been the CEO of IndusInd Bank since March 2020 and is due for reappointment in March 2025.
All eyes will be on whether he gets a three-year extension from the Reserve Bank of India. That would be critical, considering that Kathpalia is just half-way in the journey of transformation and his presence is essential to ensure continuity in the transformation process.
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