IndusInd continues on recovery path; investors need more conviction for rerating
PremiumIndusind CEO believes they would be able to meet the guidance on growth, asset quality in FY22
IndusInd Bank Ltd’s March quarter performance didn’t have any nasty surprises. Its operating metrics showed the anticipated improvement, with the lender faring better than peers in some of them.
Asset quality, which has been a key parameter that set IndusInd Bank apart from most peers, was stable. Sure, fresh slippages at ₹3,829 crore for the quarter were slightly higher, as pointed out by analysts at Jefferies India Pvt Ltd.
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However, this has been offset by a rise in upgrades to ₹1,875 crore and recoveries of roughly ₹940 crore. Headline bad loan ratios didn’t hurt with gross bad loan ratio coming in at 2.67%, lower than 2.93% in the previous quarter. That said, the lender did see stress rise in its mainstay lending business of vehicle loans and this should worry investors.
The commercial vehicle portfolio had the third-highest bad loan pile, with delinquencies forming 3% of the portfolio. The highest delinquency ratio was in the business banking segment with 3.36%. In both these segments, the delinquencies have jumped sequentially.
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In short, IndusInd Bank still faced pockets of trouble in its loan book. The message from the management, though, is that of optimism. Chief executive officer Sumant Kathpalia believes that the lender would be able to meet its guidance on growth and asset quality in FY22 despite the second wave of the pandemic.
“The second wave and the policy response towards it are different. The economy is operating at a higher level than last year. This gives us confidence," he said in a conference call on Friday. Another factor that Kathpalia pointed to was the improved collection efficiencies. However, he stopped short of giving a clear guidance for the coming quarters, citing the uncertainty of the impact of the second wave.
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The lender may believe in better days on asset quality but it is not leaving anything to chance. The bank set aside ₹1,866 crore as provisioning in the March quarter and its coverage ratio rose to 75%. Besides this, the bank also has increased its specific provisions towards pandemic risks, Kathpalia said. In other words, the bank is sufficiently covered.
IndusInd Bank may have given enough comfort on asset quality but growth is another matter. True, its loan book showed a marked improvement from the December quarter by growing 3% year-on-year. However, growth in its commercial vehicle segment remained tepid. Here again, the management is confident of a swift recovery. The lender hopes that the resilience of the rural economy and an expected normal monsoon would help on this front.
IndusInd Bank’s valuations have been driven more by its growth trajectory than its asset quality. Its share price has risen nearly three times from its 2020 lows but still remains well below its pre-pandemic highs. In the wake of the second wave, shares have underperformed the broad market and even the sectoral index. For the bank’s valuations to get a boost, it needs to regain its double-digit loan growth. While organic opportunities seem limited amid a raging pandemic, an acquisition may serve this purpose.
Last month, Citibank announced its exit from retail operations in India and analysts have pointed out that the foreign lender’s retail portfolio is a lucrative buy for banks such as IndusInd Bank. Kathpalia has not ruled out the inorganic route.
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