Stress on IndusInd Bank’s own loan book is likely to increase (Mint file)
Stress on IndusInd Bank’s own loan book is likely to increase (Mint file)

IndusInd Bank investors ignore better profitability amid asset quality worries

  • The bank has very little insurance against future risks as provision coverage ratio was flat at 43% for the June quarter
  • Excluding Bharat Financial's net profit of 213.02 crore, IndusInd Bank’s profit growth was 18% year-on-year

A 38% surge in June quarter net profit on the back of 34% rise in core income should have been enough to cheer investors of IndusInd bank. But looks like its investors don’t want to leave the lender off the hook yet for its disastrous numbers in the March quarter.

Ergo, the stock’s reaction on Friday to the improved profitability metrics reported by the bank was contrary as it ended nearly 2% lower.

It should be noted that both net profit and total income include that of micro-finance lender Bharat Financial Ltd, which got merged with the bank. IndusInd Bank said the results aren't comparable as a result. Excluding the micro lender’s net profit of 213.02 crore, IndusInd Bank’s profit growth was 18% year-on-year.

So the bank had help from the merger on profitability and clearly its efficiency has increased. The outlook on its deposits is sanguine given the potential of raising deposits albeit small from the microfinance company’s borrower base.

But the story on the loan book is still grim.

To start with, the private bank’s stockpile of stressed assets hasn’t reduced materially and they cannot reduce simply because resolution has been slow. This is true in the case of Infrastructure Leasing & Financial Services Ltd (IL&FS) and exposures to certain non-bank finance companies. The bank has very little insurance against future risk as its provision coverage ratio remained flat at 43% for the June quarter. Analysts were disappointed that the lender did not choose to increase provisions from the amplified profits.

Granted that incremental slippages have dropped sharply but as the adjoining chart shows, its gross bad loan ratio is still elevated at 2.15%. Swallowing a microfinance lender brings its own set of risks too on the delinquency side.

To be sure, Bharat Financial’s disbursements dropped marginally in the June quarter as the microlender became cautious in some states sensing a rise in risk.

Stress on IndusInd Bank’s own loan book is likely to increase and analysts believe the lender won’t be able to deliver on its guidance of 60-65 basis points on credit costs for FY20.

The stock trades at a multiple of 2.44 times its estimated book value for FY21, cheaper than larger peers such as HDFC Bank and Kotak Mahindra Bank, but dearer than ICICI Bank and Axis Bank.

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