The markets were unconvinced by IndusInd Bank's June-quarter (Q1FY27) earnings, which showed early signs of a turnaround. The stock fell over 5% on Thursday, perhaps owing to profit-booking as it had already rallied 18% over the past month until Wednesday in anticipation of a recovery.
The governance crisis that erupted in September 2024 and escalated had brought into question the bank’s accounting practices, particularly related to derivatives and microfinance loans.
Following several quarters of fixing the overstated microfinance incomes and misclassified loans, IndusInd’s Q1 net profit came in at ₹1,037 crore, against ₹604 crore last year, aided by a return to sequential loan growth and improving asset quality. Loans grew 3.3% sequentially to ₹3.26 trillion and gross NPA ratio improved 18 bps to 3.25%, led by sharp moderation in microfinance stress.
The bank’s management indicated that credit costs have room to decline as legacy stress continues to unwind. In fact, after 0.63% return on assets (ROA) in Q1, excluding interest on tax refunds, the FY27 exit ROA is seen at 1%, with credit costs contributing to 40% of the improvement.
However, while the management aspires to grow broadly in line with the industry during FY27, expectations should be tempered, looking at the 2.3% year-on-year fall in Q1 advances, against the system’s 18.6% growth.
While reported net interest margin (NIM) expanded almost 20 bps sequentially to 3.57%, adjusted for income-tax refunds, it fell 4 bps to 3.35% due to a higher share of low-yielding wholesale loans. So, reported NIM can moderate in Q2.
H2 onwards, management is penciling in faster growth in higher-yielding retail and SME loans. Retail loans grew slower in Q1 due to seasonality and selective underwriting following stress in the books.
Growth strategy
Encouragingly, a bulk of the growth from H2 is expected from secured retail products like mortgages and gold loans while continuing selectivity in unsecured lending—a strategy that could support growth and improve margins without sacrificing the recent gains in asset quality.
At almost 1.1x FY28 estimated book value, as per Bloomberg, there is room for appreciation.
Fresh whistleblower complaints reportedly sent in May to the Prime Minister’s Office and regulators allege insider trading, evergreening of microfinance loans and suppression of audit findings.
While the bank denied receiving any communication from the authorities, such reports have triggered renewed caution. So, investors are unlikely to reward the bank with peer valuations until consistent execution and clean governance are demonstrated.