Focus on retail finance helps IndusInd Bank’s performance

In just over two years, IndusInd Bank Ltd’s consumer finance portfolio has grown 10 percentage points to account for over half its loan book. For the quarter ended June, loans to retail customers grew a sizzling 48% from a year ago.

There is a credit growth slump in the economy, investment demand is in the doldrums and overall bank credit at the end of 15 June was 17.5%, one of the lowest in recent years. Aided by these small loans, IndusInd Bank grew its loan book 31% from a year ago, albeit on a small base.

Retail loans yield higher returns than corporate advances, often a good 5 percentage points over the latter category. However, in keeping with the trend, deposit growth was a tad slower at 28%. The bank made up for it with higher borrowing, which grew 31% over a year ago.

Although liquidity has improved in the system in recent times and deposit costs have declined, IndusInd Bank’s cost of funds grew 40 basis points from a quarter ago. That was not matched by a similar increase in yields on advances, perhaps owing to the competitive nature of lending these days. A basis point is one-hundredth of a percentage point.

As a result, IndusInd Bank’s net interest margins declined 7 basis points from a quarter ago to 3.22%. The fall from the year-ago number was much sharper.

Retail advances are a doubled-edged sword even if they are the most secured assets. Nearly a quarter of IndusInd Bank’s loans go towards financing commercial vehicles, a sector closely linked with the economy. A prolonged slowdown can play havoc on trucker finances and adds risks to this portfolio.

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That said, IndusInd Bank’s asset quality is remarkably robust. Gross non-performing assets as a proportion of advances remain stable at less than 1%. Recast loans remain at about a quarter of a percentage point.

The sharp increase in credit meant IndusInd Bank reported a 24% increase in net interest income. Fee income grew 48% boosted by an increase from foreign exchange, while the bank’s nascent investment banking division has started contributing. The net result is a profit after tax growth of 31%.

At a time when project financing is depressed, IndusInd Bank’s strategy of focusing on retail finance works well, provided it’s able to keep the costs of branch expansion under control. The consistent performance also shows in its valuations; the bank is trading at 2.96 times estimated book value for fiscal 2013, at a premium to all private banks barring HDFC Bank Ltd and Kotak Mahindra Bank Ltd.

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