There were pristinely priced private sector bank stocks and then there was IndusInd Bank Ltd.
Just about a year back, the lender’s stock was priced to perfection, and a darling of both foreign and domestic investors. At that time, it traded at nearly four times its estimated book value for FY19, which was higher than larger-sized HDFC Bank Ltd. The latter, seen as the benchmark for the sector, traded at 3.5 times FY19 book value then.
But IndusInd Bank has fallen out of favour now. Its shares have lost more than 28% in the past year and the lender now trades at a far more modest valuation multiple of 2.7 times estimated book value for FY20. In comparison, HDFC Bank trades at 3.9 times its estimated FY20 book value.
Some analysts see more downside. Last week, UBS Securities India Pvt. Ltd downgraded IndusInd Bank to sell from neutral, and even cut its target price by a steep 17%. The step by UBS comes a month after the bank reported one of its worst performances in the March quarter. Its exposure to stressed infra financier, Infrastructure Leasing and Financial Services Ltd (IL&FS), had caused a 62% drop in net profit.
Investors are like doctors and a small cut on the balance sheet would prompt them to check for incipient trouble elsewhere on the books.
In IndusInd Bank’s case, UBS found out that the lender could be at risk given its retail deposits are just 20% of its external liabilities. “It is a structural issue and often manifests in credit quality surprises," the firm said in its note.
UBS was also bothered by the fact that 1.9% of the lender’s loan book comprises loans to conglomerates that are no longer able to pay back lenders.
The bank’s chief Romesh Sobti said the lender has provided for all possible stress in the March quarter.
With their trust on asset quality blown by Yes Bank Ltd recently, investors are not willing to bestow faith on IndusInd Bank yet.
Ergo, the question asked is whether there are more skeletons in the bank’s closet. IndusInd Bank’s total fund-based exposure to non-bank lenders including housing finance companies is 4.38% as of March. This could be a potential pain point as well.
Since credit costs are going to be high, the bank no longer deserves a lofty premium on its stock, according to analysts. Analysts at JM Financial noted that much of the bad news is already priced in the stock and the management has assured investors on earnings. To be sure, the stock still has numerous buy ratings, according to Bloomberg data.
That said, some analysts are concerned that the current valuations too could be challenged, depending on how slippages pan out.