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Home / Industry / Banking /  Here's why IndusInd Bank's net profit doubled in the June quarter

Shares of IndusInd Bank surged over 3% yesterday and remained among the top performers in the Nifty 50 index.

The stock climbed after the bank posted a strong number for the first quarter of the year 2021-22.

IndusInd Bank’s standalone net profit more than doubled and surged 111.7% in the first quarter led by lower provisions and robust growth in net interest income.

For the quarter ended June 2021, the lender reported standalone net profit of 9.7 bn compared to 4.6 bn in the same quarter of last fiscal.

Rise in net interest income aid growth in the quarter

The company's net interest income increased by a similar 7.7% to 35.6 bn in the April to June 2021 quarter from 33.1 bn in the same period last fiscal.

Net interest margin was lower at 4.1 bn as on 30 June 2021 from 4.3% a year ago.

In a statement on Tuesday, the bank said this was due to lower credit offtake and surplus liquidity placed under repo with Reserve Bank of India (RBI).

Other income jumped up by 17.2% on a year on year (YoY) basis to 17.8 bn during the quarter.

Its total income grew by 7.8% in the first quarter of the fiscal to 93.6 bn against 86.8 bn a year ago.

Asset quality deteriorated amid the second wave of the Covid-19 pandemic

IndusInd Bank’s asset quality worsened as gross non-performing asset (NPA) assets rose to 61.6 bn or 2.9% of gross advances as on 30 June 2021 from 2.5% a year ago and 2.7% as on 31 March 2021.

Net NPAs were at almost the same level at 0.8% of net advances as on 30 June 2021 from 0.9% a year ago. However, on a sequential basis it was much higher compared to 0.7% as on 31 March 2021.

In the June quarter, the bank added 27.6 bn worth bad loans, owing to collection issues during the quarter. Of this, 23.4 bn came from the consumer finance book.

IndusInd Bank hopes for a quick revival after a covid-ravaged quarter

IndusInd Bank saw all the possible trouble that lenders faced during the second wave of the pandemic, from increase in stress to lack of growth opportunities.

But the bank’s management believes that defaults will reduce, giving it confidence to increase disbursements in the coming months.

Sumant Kathpalia, the bank’s managing director and chief executive officer, said he derives confidence in growth from the improvement in collections since June and believes the robustness of the corporate loan book will support the balance sheet.

For the June quarter, though, IndusInd Bank hardly grew its loan book.

On a YoY basis, the growth was at 6.6%, mainly due to a low base. Last year’s loan growth was a mere 2% as a nationwide lockdown hit business.

This impacted its margins as the bank had to carry over 120 bn worth of excess liquidity from the previous quarter. Core interest income growth, too, was underwhelming due to the same.

What’s behind the 9.7 bn net profit that was much higher than analysts’ estimates?

This brings us to provisions. IndusInd Bank set aside 18.5 bn as provisions, marginally lower than the previous quarter despite a 6.7% increase in its bad loan pile.

The bank also reported a rise in restructured loan book, which now stands at 2.8% of the total.

The management has said that it holds 5.1 bn provisions specifically towards pandemic-related stress and does not see an increase in provisioning going forward.

To be fair, fresh slippages are down sequentially and the bank does not expect restructured loans to turn bad.

The bank’s biggest pain point has been unsecured credit card loans and loans to buyers of small commercial vehicles and three-wheelers. These categories saw the biggest increase in delinquencies during the June quarter.

Given that vehicle finance has a large share in the loan book, IndusInd Bank needs this segment to bounce back fast. According to Kathpalia, the bank’s collections look promising. He expects growth to pick up soon.

IndusInd Bank is hopeful of better days ahead as the second wave of the pandemic recedes and restrictions are removed progressively.

How the stock markets reacted to IndusInd Bank’s earnings

Shares of IndusInd Bank opened at 995 on the BSE and 992 on the NSE, yesterday.

Its share price closed at 992.3 (up 1%) on the BSE.

At its current price, it is trading at a P/E of 26.

The share touched its 52-week high of 1,119.2 and 52-week low of 483.5 on 25 February 2021 and 24 September 2020, respectively.

Over the last 30 days, the IndusInd Bank share price is down 2.2%. Over the last one year, the company’s share price is up 94.6%.

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About IndusInd Bank

IndusInd Bank, which commenced operations in 1994, caters to the needs of both consumer and corporate customers. Its technology platform supports multi-channel delivery capabilities.

As on 31 March 2021, IndusInd Bank has 2,015 branches and 2,872 ATMs spread across geographical locations of the country. The bank also has representative offices in London, Dubai and Abu Dhabi.

IndusInd Bank was included in the NSE Nifty benchmark index on 1 April 2013.

For more details about the bank, you can have a look at IndusInd Bank's fact sheet and IndusInd Bank's quarterly results on our website.

For a sector overview, you can read our banking sector report.

This article is syndicated from Equitymaster.com

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