IndusInd Bank: asset quality deteriorates further; upside limited
While IndusInd Bank’s profitability was robust, deterioration in asset quality came as a disappointment
Ahead of its June-quarter earnings announcement, the IndusInd Bank stock touched a lifetime high of Rs1,571.50 on BSE. It came off a bit post-results, ending Tuesday’s session at Rs1,559.
Higher net interest income and other income aided the private sector lender to post a net profit of Rs836.55 crore, marginally beating Bloomberg analysts’ estimate of Rs833.70 crore.
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Net interest income grew 31% on a year-on-year basis, while net interest margins were stable at 4% in the June quarter.
While profitability was robust, deterioration in asset quality came as a disappointment. For the second quarter in a row, gross non-performing assets (NPAs) as a percentage of total loans increased. They rose to 1.09% as compared to 0.93% in the previous quarter. It is after several quarters that the bank’s gross NPAs have breached the 1% mark (see chart).
Similarly, net NPAs rose to 0.44% in the June quarter, compared to 0.39% in the previous quarter and 0.38% in the same quarter last year.
Sequentially, provisions fell 28% to Rs309.97 crore in the June quarter from Rs430.13 crore a quarter ago, although it surged year-on-year. In the last quarter, IndusInd Bank had made a one-time provision of Rs122 crore against the recently concluded UltraTech Cement Ltd and Jaiprakash Associates Ltd deal.
In a post-earnings press conference, the management said, “The UltraTech-JP deal has been done, that provision has been reversed, but not a penny of that provision has gone into net profit.”
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The bank has used Rs70 crore from that amount to make a floating provision. Also, it has retained standard provision of Rs33 crore to account for residual payment that is to come from the aforementioned deal. Some provisions were also made on microfinance lending books.
Further, the management added that among the 12 accounts that were referred to National Company Law Tribunal, the bank has exposure to three and has provided for these accounts in the June quarter. The exposure to these three accounts is to the tune of Rs50 crore, it said.
Meanwhile, the lender’s commercial vehicle finance segment witnessed a subdued quarter.
The vehicle finance segment was partly impacted by BS-IV emission norms and partly due to goods and services tax implementation, which led to a slowdown in supply of trucks. Thus, the lender’s vehicle finance book grew at 17%, while the non-vehicle finance book grew at 35%. While the latter is likely to grow at a robust pace, the former will continue to post weak growth in the current quarter as well, added the management.
On the valuation front, IndusInd Bank is trading at a one-year forward price-to-book multiple of 3.4 times, higher than some of its peers. Given the decline in asset quality, analysts see limited upside in the stock.