Beaten down valuations draw investors to IndusInd Bank1 min read . Updated: 16 Sep 2020, 10:41 PM IST
A key barometer that investors would look at will be the pile of loans the bank will restructure this year
IndusInd Bank Ltd’s shares have risen 25% in the last one month, compared to a 3.7% rise in the Nifty Bank index. However, despite these recent gains, the private sector lender’s shares still trail that of the sector index so far this year.
This recent investor optimism is largely because of the bank successfully raising ₹3,288 crore capital through a qualified institutional placement. The fact that the bank’s promoters were willing to inc-rease stake was also a positive.
That said, whether investors would remain warm to IndusInd Bank would depend largely on how it navigates the pandemic’s impact. The lender’s Q1 performance was mixed but its own caution in lending stood out. Loan book growth was just 2% and the management indicated it is not chasing every borrower. The lender’s focus is now on strengthening its retail liability franchise. “Lower reliance on wholesale funds and cost will support asset growth prospects with balanced risks," wrote analysts at Jefferies India Pvt. Ltd.
The bank’s deposits grew 6% in Q1. In a post-earnings conference call, the management had said it will focus on boosting retail deposits. However, deposit mobilization may not be the big challenge for banks. In a crisis, bank deposits gain popularity as an investment option given their safety and liquidity perception in comparison to other financial assets. IndusInd Bank’s biggest challenge is asset quality. A key barometer that investors would look at will be the pile of loans the bank will restructure this year.
The Reserve Bank of India has allowed a one-time restructuring of loans hit by the pandemic and one of the options for lenders is to extend moratorium. However, restructuring reduces the visibility of stress in loans. This is expected to weigh on bank shares and IndusInd Bank won’t be an exception.
Nevertheless, the stock could be up for re-rating as it has been beaten down more than its peers. Despite the recent rise, the shares trade at a marginal discount to estimated book value for FY22. This compares with a multiple of 2.7 times estimated FY22 book value for HDFC Bank and multiple of 3 for Kotak Mahindra Bank shares. “Though we think asset quality risks for IndusInd Bank and State Bank of India remain higher than peers, we believe current valuations reflect most negatives, driving our upgrades," said analysts at UBS in a 27 August report.