Shares of IndusInd Bank are feeling the heat after fiasco at Yes Bank

The IndusInd Bank’s stock, once priced to perfection, has fallen more than 60% this year, after a 44% plunge in just the past seven trading sessions. Only some of this can be attributed to the secular fall in equity indices owing to the Covid-19 outbreak.

A lot of it is due to worries that smaller private sector banks could face some deposit flight in the wake of the Yes Bank debacle. “The key factor separating vulnerable banks from stronger peers is a low-cost stable deposit franchise," said analysts at Anand Rathi Share and Stock Brokers Ltd in a note, adding that smaller private sector lenders will likely see lower deposit growth going ahead.

IndusInd Bank is unlikely to be an outlier. The bank’s low-cost deposits form roughly 40% of its total deposit base.

A reassurance from its promoter Hinduja Group doesn’t seem to have allayed fears. An Economic Times report on Tuesday stated that the promoters have sought the regulator’s approval to hike their stake to 26% in the bank against the current cap of 15%.

Moreover, there have been jitters specific to the bank on asset quality and the leadership transition, which are yet to play out.

Current managing director and chief executive officer (CEO) Romesh Sobti is due to retire this month and Sumant Kathpalia, head (consumer banking), would succeed him. That Kathpalia is an insider credited with building the successful consumer banking vertical of the lender should give comfort. But risks to the bank’s balance sheet cannot be ignored.

IndusInd Bank’s slippages were on the rise in the December quarter and gross bad loans formed 2.18% of the loan book, far higher than the 1.08% two years ago. Roughly 21% of the bank’s loan book is to midsized and small businesses, a pain-point for it. The current quarter has been brutal for small and even midsize businesses owing to the economic slowdown and the coronavirus outbreak.

The bank’s large exposure to the automobile industry through vehicle loans (as much as 28% of all loans) is not helping either, given the protracted slowdown in the auto sector.

Analysts believe that asset quality concerns will persist and weigh on the share price going ahead. “An orderly transition to a new CEO and stability in asset quality are key near-term catalysts," said analysts at HSBC Securities and Capital Markets (India) Pvt. Ltd in a 21 February note.

Following the massive fall in its stock so far in 2020, IndusInd Bank is trading at only 1.3 times its adjusted book value for FY21, reflecting investor concerns about asset quality.