BackIndusInd Bank makes a big play for investor confidence after a mixed Q1
Investors would derive comfort from the capital raising plan, especially as the capital adequacy ratio is at 15.6%
PremiumIndusInd Bank’s June-quarter performance was similar to most of its private sector peers. A sharp drop in moratorium levels and an increase in provisioning characterized an otherwise sober performance.
From nearly half under moratorium a few months ago, only 16% of the loan book is now under it. The private sector lender chose to be cautious, visible in the mere 2% growth of the loan book. The book shrank 4% sequentially.
What stood out was the management commentary, which was optimistic but peppered with caution. New chief Sumant Kathpalia indicated that the bank would go slow on unsecured lending, and loans to small businesses would be looked at closely. IndusInd Bank may see its slippage ratio increase by 92 basis points due to covid-19 and to mitigate this the lender has made a provision of ₹1,203 crore. “We will not be aggressive on asset growth this quarter," Kathpalia said in an interaction with the media. At the same time, the management highlighted that collections from borrowers have increased sharply over the past months and stood at 86% as of 5 July.
But just improving performance is not enough to win investor confidence, and the lender knows that. IndusInd Bank will raise ₹3,288 crore through a preferential share issue and has already got a bunch of qualified institutional buyers for it. US-based hedge fund Route One Investment Co. has got regulatory approval to increase its stake to 10% in the bank from the current 4.9%, according to an Economic Times report last week. The hedge fund and three other investors would together put in roughly ₹2,500 crore into the bank, the lender said in an exchange filing on Tuesday. The rest would be brought by promoters Hinduja Group. They had already implored the regulator for permission to raise their stake in the bank to 26% from the current 13.3%.
The shares would be issued at ₹524 a piece, the bank said in its exchange filing. Despite Tuesday’s 4% rise, the stock still trades 56% down from the peaks in February and has underperformed the sector index so far.
The management said the fundraising is not a hedge against covid-19 risks but rather an attempt to raise investor confidence in the bank. For the pandemic though, the lender has enough provisions as per its internal stress test.
Investors would derive comfort from the capital-raising plan, especially when the capital adequacy ratio is already at a healthy 15.6%. But the key to confidence is also how the moratorium levels evolve. What remains to be seen is how accurate IndusInd’s stress test is when it comes to asset quality. That would also determine whether the capital it plans to raise is enough.
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