IndusInd Bank retained its mojo with healthy growth in its loan book, but that wasn’t enough to put asset quality concerns and risk of slippages completely to rest. While the bank’s merger with Bharat Financial Inclusion improved profitability, it pushes the risk profile higher, according to Jefferies India. The agency added that while asset quality improved, the concentrated exposure in perceived risky segments warrants a close watch.
“The high degree of exposure in segments like microfinance, real estate and construction, loans against property, gems & jewellery as well as higher credit exposure through off-balance sheet and derivatives against peer banks implies a relatively higher-risk business model, which guides valuation multiples much below the average witnessed in the last few years,” it noted. On the other hand, HDFC Securities, maintained that though apprehensions on asset quality, following a slew of defaults and downgrades in FY19 were mostly factored in, IndusInd significantly lagged behind larger private peers in FY19.
“The reduction in the exposure to potentially stressed companies and further contraction in Special Mention Accounts I & II provides mild reinforcement to our positive stance, which is founded on the strength of IndusInd’s core metrics and execution capabilities,” noted HDFC Securities, adding, however, that the management’s comfort with low coverage was disappointing.
Following the rise in gross bad loans due to IL&FS account during Q4, FY19, gross and net NPAs reduced to 2.15 and 1.23 per cent respectively, while slippages moderated to Rs 700 crore The bank’s exposure to stressed companies too fell by Rs 300 crore sequentially during Q1, while the bank’s watchlist (exposure to potentially stressed groups) fell marginally to 1.7 per cent.
While IndusInd reported a better-than-expected net profit growth driven by higher treasury gains and lower-than-expected provisioning. While overall margins improved to 4.1 per cent owing to the BHAFIN merger, the bank’s margins at 3.7% (ex-BHAFIN) were lower than average margins of 3.9% over the last three fiscals. However, NPAs in the commercial vehicle book increased sharply, and amid the slowdown in auto sales, the loan book remains a key monitorable, according to Reliance Securities. The bank turned in impressive vehicle financing growth of 24 per cent over last year, while deposit growth was an impressive 26 per cent, implying scope for growth.
Higher credit cost this financial year
Brokerages anticipate higher credit cost for FY20 (above 100 bps), against the bank’s guidance of 60 bps, due to the risk of slippages from the corporate portfolio and the need for higher provisions