IndusInd Bank: A strong growth in core operations overshadows jump in NPAs

Not known for disappointing the Street, IndusInd Bank’s December quarter (Q3) results were an aberration. Even as net interest income (NII) at Rs 18.95 billion registered a decent 20 per cent growth year-on-year, it was marginally lower than the Street's expectation. Net profit of Rs 9.36 billion was, however, in line with estimates. 

While this doesn’t justify the correction of over two per cent seen in IndusInd Bank stock post results, for investors accustomed to seeing NII growth of 25–30 per cent in the past, the Q3 show is a let-down. That said, the bank’s balance sheet has reached a scale of Rs 2,000 billion, and hence expecting past growth rate would be a stretch. 

The comforting factor is that the bank’s return profile is at its all-time high with return on equity at 17 per cent and return on assets at two per cent. Capital adequacy at 15.8 per cent in Q3 will enable the bank to improve these parameters as the loan growth remains strong. While these are long-term positive macro aspects, there are some finer points which could mean trouble in near term. 

Gross non-performing assets (NPA) ratio jumped by about 22 bps year-on-year to 1.16 per cent in Q3. Though marginal, the fact the NPAs have emerged from across segments – loan against property, commercial vehicles and corporate loan accounts, suggests that caution is warranted going ahead. A lot hinges on sustaining the loan growth as seen in Q3 across segments with corporate and retail books growing by 26 per cent and 24 per cent, respectively.

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Nonetheless, credit costs or percentage of provisioning for bad loans as ratio of total advances was maintained at 15 bps in Q3 and the bank is confident of meeting its full-year target of 60 bps. 

A more seasoned corporate loan book skewed towards A-rated companies is also positive. A year ago, majority of accounts were in the BBB segment. The probable impact of divergence in bad loan provisioning for FY17 will be felt only in the March quarter as the bank awaits preliminary findings from the Reserve Bank of India. Surprises, if any could further elevate loan losses and NPA ratios for the bank as it has utilised most of its provisioning buffer in Q3. 

The Street will also monitor the yields on assets. Net interest margin (NIMs) has been maintained at four per cent in Q3. However, yield on advances has shrunk from 11.73 per cent a year-ago to 11.04 per cent in Q3, indicating the intensity of competition in the industry. Falling cost of deposits is helping the bank for now. With the CASA (current account–savings account) growth of 68 per cent and the CASA ratio of 43 per cent, Asutosh Mishra of Reliance Securities is confident that IndusInd Bank should sustain four per cent NIMs. “IndusInd Bank’s growth over demonetisation base is commendable,” he adds. 

However, with IndusInd emerging as the most preferred banking stocks despite tall valuations (4x FY19 price-to-book), it is important not to disappoint its investors on these counts.   

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