BL Research Bureau
A weak operating environment, increasing concerns over corporate defaults, and worsening credit risk situation has been dampening market sentiment in recent months. Against this backdrop, IndusInd Bank reporting higher slippages and a substantial increase in its SMA book (special mention accounts where payments are overdue by 1-90 days) in the latest September quarter, appears to have not gone down well with investors. Hence despite reporting a 21 per cent growth in loans, 32 per cent growth in net interest income and 52 per cent growth in net profit, the stock slipped by 6 per cent post the results announcement.
While the bank’s healthy margins, return ratios and capital adequacy are key positives, September quarter results suggest that surprises on the asset quality front cannot be ruled out, given the bank’s exposure to stressed sectors such as real estate. This is likely to weigh on the stock until the broader risk perception improves in the coming quarters.
At first glance, gross non-performing asset ratio which came in at 2.19 per cent of loans in the September quarter, only slightly higher than the 2.15 per cent the bank reported in the previous June quarter, does not throw up any concerns. But digging deeper it appears that few trends may need a watch in the coming quarters.
One, additions to bad loans has moved up in the September quarter---to ₹1,102 crore from ₹725 crore in the June quarter. Within corporate, slippages increased to ₹479 crore in the September quarter from ₹175 crore in the June quarter. A higher reduction in NPAs has offset the impact of steeper slippages, though. Interestingly, within retail too the bank has seen an increase in stress. As highlighted before, for IndusInd Bank, NPAs in credit cards that stood at 1.3 per cent in March 2017 inched up to 2.2 per cent as of June 2019 quarter and further to 2.4 per cent in the September quarter.
Two, the bank’s SMA book has gone up significantly. SMA1 (where payments are overdue by 31-60 days) is 0.38 per cent of loans up from 0.18 per cent of loans in the June quarter. Importantly, SMA2 (overdue by 61-90 days) book has increased to ₹1,143 crore in the September quarter from ₹324 crore in the June quarter. Some exposure to real estate, lease rental and NBFCs falling into the SMA2 book has been a key reason for the increase. The bank has stated that the ₹257 crore exposure to NBFCs under SMA 2 is expected to be fully recovered by October. Nonetheless, the broad increase in SMA 2 book needs a watch.
Three, the bank’s exposure to the three stressed groups in media, HFC and the diversified sector has been disclosed at 1.1 per cent of loans. Though the bank expects the exposure to reduce to 0.8 per cent by October, it may remain an overhang on the stock.
Core performance
Notwithstanding the slowdown in credit growth within the banking sector over the last two to three years, IndusInd Bank has been able to grow its loan book at a healthy 25-30 per cent over the past several quarters. In the latest September quarter, however, the loan growth came in lower at 21 per cent, which has also been a dampener of sorts. This is the second quarter which takes into account Bharat Financial Inclusion’s results as well, after the completion of the merger with IndusInd. With the loan portfolio re-grouped, consumer finance division (that includes microfinance portfolio) constitutes 55 per cent of loans, up from 40-odd per cent in the past years. Microfinance in itself now contributes about 10 per cent of the merged entity’s loan book. Despite the overall sluggishness in the commercial vehicle space, the bank’s credit to the segment grew by 14 per cent YoY.
While overall deposits grew by a healthy 23 per cent, there has been some moderation in CASA deposits. CASA ratio has dipped to 41.5 per cent in the September quarter from 43.1 percent in the June quarter.
The bank’s net interest margin, however, inched up by 5 bps to 4.1 per cent in the September quarter. IndusInd’s relatively higher proportion of fixed-rate loans, could be one reason for the increase in margins, as deposit rates continue to fall. The bank’s tidy share of fixed-rate loans can help it tide over margin pressure better than others, after the RBI’s mandate to link new floating rate retail and MSME loans to an external benchmark from October.