IndusInd Bank Ltd won the award for consistency yet again, reporting net profit growth of 25% and net interest income (NII) growth of 20% for the December quarter. The fact that it met Street estimates on profit growth should have been enough to keep already happy investors joyful.

But the stock fell 2% after the results, indicating that investors have some misgivings. A look at its core income and asset quality indicates that the lender is finally huffing and puffing after an impressive run in the past quarters.

The growth in NII, the core income a bank earns, would seem impressive compared with peers but for IndusInd Bank it was the slowest in 10 quarters. For a lender which has been beating its peers hollow on balance-sheet growth, this is not good news.

Add the decline in operating profit growth to 22% from an average 30% in the recent past and investors are justified in becoming jittery.

Another uncomfortable development is the surge in bad loans in recent quarters. For the December quarter, IndusInd Bank saw a jump of 54% in its gross bad loans from a year ago. This is historically the highest year-on-year jump in bad loans for the lender.

This rise is over the 49% increase in bad loans in the September quarter. This has worsened the bad loan ratio to 1.16% from 1.08% a year ago.

Considering that the bank would soon take a microfinance portfolio through its acquisition of Bharat Financial Inclusion Ltd, it would have to contend with a further increase in bad loans, given that microfinance asset quality is still shaky.

Fresh slippages haven’t abated and were Rs408 crore for the third quarter, a large number for two straight quarters now.

Romesh Sobti, managing director of the bank, said that bad loan accretion is broad-based and not restricted to only a few large accounts.

The bright side is that credit growth is still an impressive 24% and has hardly slowed down. The fact that IndusInd Bank’s corporate loan growth too continues to be high is another big plus.

So long as it maintains its credit growth and fixes its emerging asset quality issues, IndusInd Bank can still justify its valuations. The stock currently trades at more than three times its estimated book value for fiscal year 2019.

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