IndusInd Bank disappoints on asset quality in Q3 as fraud rears its head
2 min read.Updated: 15 Jan 2020, 09:20 AM ISTAparna Iyer
IndusInd Bank raises provisions due to fresh slippages, to beef up provisioning coverage ratio
Lender labels two accounts as fraud, necessitating 100% provisioning against them
Investors didn’t like IndusInd Bank Ltd’s December quarter performance one bit. The angst is evident in the nearly 4% fall in the stock on Tuesday in reaction to the lender’s quarterly results.
Net profit missed Street estimates but this was the least of the worries. The reasons behind this profit miss was an increase in provisioning, which was acceptable as the lender bought more protection from potential risks by shoring up its provisions for stressed assets. With accelerated provisioning, the private sector bank beefed up its provision coverage ratio to 53%.
But that is one part. Increase in provisions was inevitable for IndusInd Bank as its slippages surged. Fresh slippages doubled from last year and are up 76% from the second quarter. “Operating environment is as tough as it gets," said Romesh Sobti, managing director and CEO.
Even these were more or less expected by analysts. The highlight of the bank’s asset quality metrics was the fact that it has labelled two accounts as fraud. According to CNBC-TV18, the two fraud accounts are Dewan Housing Finance Corp. Ltd (DHFL), and Cox and Kings. This has repercussions not only for IndusInd Bank but also for other lenders that have exposure to these two accounts.
Particularly in the case of DHFL, the fraud label is a big blow as banks recently decided to help the firm resume its lending operations. Also, lenders have been pushing for a resolution with little success so far.
There is trouble elsewhere too for IndusInd Bank. Slippages from its otherwise-stable consumer loan book also increased. Analysts at Edelweiss Financial Services Ltd noted that the slippage rate for the consumer loan portfolio rose to 2.5% from 2.1% a year ago.
To be fair, there is a silver lining for IndusInd Bank. Its core income grew by 34% from a year ago, which is healthy. But the comfort comes from the fact that the lender’s valuations have been beaten down over the last one year. According to analysts, valuations reflect the bank’s stress levels.
The IndusInd Bank stock has underperformed the broad market. After a 17% fall since the beginning of FY20, the stock trades at a modest multiple of a little over two times its estimated book value for FY21.
Recall that the lender had made a presentation highlighting its strategy for growth a few weeks ago. In a report following the meet, analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd said that although the corporate asset quality could be under pressure in the short term, the bank’s loan book is well-diversified.
That said, a management transition will weigh on sentiment for the IndusInd Bank stock as Sobti is set to retire next month. While Sobti has assured succession will be smooth, investors will watch for any changes in strategy from the new chief.