When life gives you lemons, you may find yourself in a pickle. This is true for IndusInd Bank Ltd.
The private sector lender had to face the wrath of investors on Thursday even though it reported a 50% jump in profit for the September quarter year-on-year. The bank beefed up its provisions too, taking the coverage ratio to 50% from 43% in the previous quarter.
In other words, it maintained its profitability and also bought insurance for future risk. “We have made accelerated provisions, and that is not because of slippages but to increase the coverage ratio," said managing director and chief executive officer Romesh Sobti.
But the stock fell over 6% on Thursday, indicating that investors are worried over the sharp fall in loan growth to a multi-year low.
But investors should have seen the loan deceleration coming since the bank’s book is heavy on commercial vehicle loans. The auto sector’s troubles are bound to show up.
To be sure, the broad market was weak too, with the Nifty ending 0.7% down and the banking index closing 2.7% lower. Even so, IndusInd Bank seems to be hit hard.
Perhaps another factor was the sharp rise in slippages for the September quarter. The pain seems to have stemmed from not just corporate loans but also consumer loans. Here too, auto loans were the culprit and microfinance loans also gave trouble.
The key question now is how much more pain the lender is likely to see. A handful of large corporate groups have emerged as key stress points for banks over the last one month. Developments in the non-banking finance sector, too, have shaken confidence in banks including IndusInd Bank. Surely, a bunch of borrowers have delayed repayments but all of them put together form not even 1% of IndusInd Bank’s loan book. Of this, the lender expects ₹257 crore worth of repayments over the next few weeks. Sobti sought to allay investor worries further and said these repayments will bring down the stress loan portfolio even more.
IndusInd Bank’s assurances can be taken in good faith but it is important to note that the lender had given similar promises in the first quarter too. Asset quality metrics haven’t stood up to scrutiny in the three months following the June quarter.
In a nutshell, investors can expect further pain on the bank’s balance sheet and the deceleration of the loan book is here to stay for some time.
Since IndusInd Bank’s valuations have been buttressed mainly by its stellar track record on loan growth and asset quality, the stock may not be out of pressure in the coming days. After the 13% drop over the last two months, the stock trades at a modest multiple of twice its estimated book value for FY21.