IL&FS pain still not over for IndusInd Bank, credit cost may rise 30-40 bps

The management expects the IL&FS provisioning to get done by March 2019 quarter
IndusInd Bank’s December 2018 quarter (Q3) results were broadly above the Street’s expectations. The bank reported net profit of Rs 985 crore, up 5.2 per cent year-on-year, against a consensus estimate of Rs 810 crore by Bloomberg analysts.

However, the reported net profit growth was its lowest since the March 2008 quarter — with the exception of September 2018 quarter — thanks to its exposure to the bankrupt IL&FS.

IndusInd has total exposure of Rs 3,000 crore to IL&FS (Rs 2,000 crore to the holding company and Rs 1,000 crore to special purpose vehicles). The bank made a Rs 255-crore contingent provision for IL&FS’ holding company, taking its total provisioning in IL&FS so far to Rs 600 crore, or 30 per cent, despite the accounts being standard at the end of the quarter. Excluding this provision, net profit growth would have been 23 per cent.

However, the IL&FS pain is still not over and could continue pinching IndusInd’s near-term earnings growth, amid an increase in credit cost (bad loan provisioning as a percentage of advances). The management expects the entire IL&FS exposure to turn bad and will therefore need to make additional provisioning.

It foresees 40-50 per cent provisioning (including the 30 per cent already made), which would be required towards loans pertaining to IL&FS’ holding company. This translates to about Rs 400 crore in additional provisioning.

This is close to 20 per cent of IndusInd’s operating profit in Q3. Some analysts see IndusInd’s credit cost guidance of 60 basis points (bps) for FY19 to rise by 30-40 bps on account of the IL&FS exposure.

At the same time, the management expects the IL&FS provisioning to get done by March 2019 quarter. Therefore, FY20 is likely to start on a clean slate with expected traction in loan book and earnings.

However, the caveat is that in Q3, the bank saw more slippages from its corporate book, taking its gross non-performing asset ratio to 1.13 per cent from 1.09 per cent in Q2. This hurt investors’ sentiments as well. In addition, there is still no clarity about the management succession.

The stock touched its day’s lows at Rs 1,549 apiece after the result, down 1.8 per cent, before closing with a gain of 1.5 per cent.

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