The IndusInd Bank Ltd stock has continued to beat the Bankex of the Bombay Stock Exchange (BSE) this year. It’s up 5% compared with a decline of 2% or so in the Bankex. But then, the lender has been an investor-favourite for a long time. The question arises: is it still doing as superlatively as expected?
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Net profit is up 75% year-on-year (y-o-y) in the March quarter, the same pace of growth as in the three months ended December (Q3). Growth in operating profit, though, was much lower at 48% compared with 68% y-o-y in Q3. Operating profit in the March quarter was only a tad higher than in Q3. Provisions and contingencies were lower than in Q3, which boosted net profit.
Advances growth during the March quarter was 5%, a bit more than that for the entire industry, but that was because some loans were sold down. Net interest margin (NIM), though, was slightly lower than in Q3, because the increase in the yield on advances hasn’t been enough to offset the increase in the cost of deposits. The net result was a 7% sequential growth in net interest income.
The problem, though, was that other income, including core fee income, was lower than in Q3; lower investment banking revenue being the main reason.
But these are one-off factors. Fee income, for instance, is set to grow strongly because the bank will shortly tie up with a housing finance company and will distribute mortgages. NIM, too, is likely to go up, since rates for bulk deposits have come down sharply, while lending rates have held up.
Deposit growth has been strong and the improvement in the proportion of low-cost current and savings account (Casa) deposits continues. Both gross and net bad debts were lower than at the end of the previous quarter. Restructured advances went up, but marginally.
Corporate and institutional banking made up 26% of IndusInd’s loans at end-March, lower than its 32% share at end-December. The share of loans to small businesses, commercial vehicles and equipment financing increased.
This is a conscious decision by the management, which says that the next three years will be spent trying to implement the second phase of its policy. The first phase involved turning around the bank, and now that it has been achieved, the management is looking at scale and turning the lender much more into a retail bank.
Towards that end, it has taken over the credit cards business of Deutsche Bank AG recently. It is launching loans against property. To grow scale, IndusInd Bank is targeting a branch network of 600-700 in the next three years compared with 300 now. A new core banking platform will service this network.
The lender is targeting a Casa of 35% in three years from the current 27%. It wants to keep loan growth at 25-30% per annum. IndusInd Bank is also open to acquisitions. Since it has managed to improve one bank so dramatically, there’s no reason why it can’t do the same to another bank.
In short, given the management’s track record, there’s every reason for the IndusInd Bank stock to continue to outperform the BSE Bankex.
Graphic by Yogesh Kumar/Mint
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