Graphic: Mint
Graphic: Mint

IndusInd Bank’s Q2 results show a peek into the IL&FS booby trap

Had it not been for this provision, IndusInd Bank would have reported a 25% growth in its profit and stuck to its historic path of being the lender with an enviable track record of profitability

IndusInd Bank Ltd’s investors have had their worst fears come true after the lender declared it had to provide against an exposure to the troubled Infrastructure Leasing and Financial Services Ltd (IL&FS). That raises the question whether other banks, some with far higher exposure to the tottering infrastructure behemoth, will also be making such provisions. Notwithstanding the fact that the exposure continues to be a standard account, IndusInd Bank prudently decided to set aside 275 crore for a potential hit.

Had it not been for this provision, IndusInd Bank would have reported a 25% growth in its profit and stuck to its historic path of being the lender with an enviable track record of profitability.

The IL&FS exposure has thus cost the bank in terms of lower profit growth and a doubling of its provisions in the September quarter, both of which were not taken kindly by investors. The private sector bank’s stock fell 1.5% in response to the results on Monday.

The bank has not made the total exposure public but if we assume that IndusInd Bank being prudent has made the 20% provision required towards a loan gone bad, the exposure totals to over 1,300 crore.

That is far lower than what other lenders, especially public sector banks, have to the vexingly structured infrastructure company IL&FS.

Nomura Securities in a report estimated the banking sector’s exposure to IL&FS to be about 57,000 crore.

Excluding the unsavoury IL&FS exposure, the lender continues to report a strong set of quarterly numbers. Its advances growth was a robust 32% led by both corporate and consumer verticals. The bank’s asset quality saw improvement with gross bad loans reducing to 1.09% of the total loan book.

Of course, a lot of the improvement in bad loan ratios is also due to strong loan growth. But slippages too fell from the year-ago period as well as sequentially. In other words, the lender’s already pristine asset quality has seen further improvement.

IndusInd Bank’s core metrics such as net interest income and net interest margin too met the Street expectations.

What the lender’s profitability will be in the coming quarters depends on how long IL&FS is able to service its loans, and indications so far are mixed on this. Moreover, if other lenders decide to be as prudent as IndusInd Bank, provisions are set to mount for them. It is no surprise that investors of bank stocks are a worried lot currently.

Trading at a multiple of three times its estimated book value for fiscal year 2020, IndusInd Bank is no longer the most expensive banking stock

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