What’s bothering IndusInd investors?

In an earnings call with analysts on Wednesday, the bank’s management said it expects demand to be strong going ahead, which should result in a loan growth of 20% year-on-year (y-o-y) for the financial year. In Q2 FY23, its overall loan book grew by 18% y-o-y, aided by improving traction in the corporate and retail loan books.

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More importantly, its MFI portfolio, which was a key area of concern, saw credit growth rising 5% y-o-y as well as better asset quality. The Reserve Bank of India’s MFI related regulatory change has been fully implemented and disruption is in the past, the management said.

However, the stock’s reaction on Thursday did not reflect the optimism. Shares of the bank slid 5% on the NSE. It was also the top loser among the Nifty 50 stocks. What is bothering investors? Drying systemic liquidity raises questions on the sustainability of the bank’s Q2 earnings performance, especially as the cost of funds are bound to increase.

“We are heading into a tough macro-economic environment with the repo rate likely to rise further. Given the tight liquidity, we also expect a desperate scramble for deposits among banks," said Krishnan ASV, senior vice president, institutional research, HDFC Securities.

As the competition for garnering more deposits heats up among large lenders, it could weigh on IndusInd’s loan growth or margins considering that IndusInd has one of the weakest deposit franchises among peers, Krishnan said.

IndusInd’s overall deposits grew 4% sequentially and 15% y-o-y in Q2, aided by a strong traction in current accounts (CA) and term deposits. However, savings account (SA) deposits saw a sequential fall of around 6%, primarily because of the implementation of centralized treasury settlements in its budgetary accounts, it said. Analysts said the SA decline is also an indication that the fight for deposits is getting increasingly competitive.

Operating expenses were high and its cost-to-income ratio stood at 44% in Q2 versus 41% in the year ago period. The increased cost was because of investments in new technology, increased appraisal cost and hiring, it said. The cost-to-income ratio is hitting a peak of 44% to 44.2% and settling around 41% to 43% range, the management said.

In Q2, the bank’s net interest income (NIM) was flat at 4.24%. The bank’s management has guided its NIM to remain in the 4.15-4.25% range.

The problem is that around 50% of its advances are fixed-rate and its focus on accelerating deposits by raising saving rates, makes the current scenario less favourable, said ICICI Securities Ltd analysts. IndusInd has raised savings deposit rates across various buckets effective 1 October.

Meanwhile, so far in 2022, the IndusInd Bank stock has rallied 24%, outperforming sector index Nifty Bank, which is up 10%. The sharp rise can be attributed to improving near-term comfort on the bank’s asset quality. That said, a steep upside from the current levels looks unlikely.

A tailwind of lower credit costs may propel it towards 15% return on equity (ROE) for FY23-24, said a report by Investec Securities.

However, some risks in Q1 emerged in this quarter too. These include credit growth led by the corporate segment and weaker retail deposits growth, it said. That, along with limited scope of NIM expansion, makes Investec less convinced on the sustainability and quality of IndusInd’s growth. Despite RoEs approaching 15%, the room for further valuation re-rating is limited, it said.

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