Uncorking promoter stake would help IndusInd Bank reclaim growth2 min read . Updated: 24 Nov 2020, 10:00 PM IST
- There are concerns on IndusInd’s growth, even as provisions beef-up has allayed asset quality fears
- The infusion of promoter capital in IndusInd Bank may help reclaim premium valuations: analysts
Once priced to perfection, the Hinduja group owned IndusInd Bank Ltd has suffered multiple blows to its valuation in calendar 2020. The collapse of a peer injected unease among depositors and investors early on, and a pandemic made things worse.
The worries are now more on growth and less on asset quality. The lender has been showing improvement in collections and has also beefed -up provisions with a coverage ratio of 77% as of September. All this has allayed fears over asset quality somewhat.
That brings us to growth. Clearly, growth has been the bedrock of the bank’s premium valuations. IndusInd Bank’s loan growth has dropped to just 2% in the September quarter from as high as 20% a year ago. Thus, the erosion in valuation has been on expected lines.
What would it take for IndusInd Bank to reclaim its premium valuations? Analysts point to capital. The level of capital determines how much a bank can grow after it has set aside money for future losses.
The lender has a promoter willing to pump in money once regulatory green signal is received. Ergo, investors were cheered after a Reserve Bank of India (RBI) working group indicated that promoter shareholding could be hiked to 26% from the current 15%.
“We further estimate that at current market prices, promoters could infuse up to ₹10,000 crore to increase stake up to 26% in the bank from 14.68% currently," analysts at Motilal Oswal Financial Services Ltd wrote in a note.
The promoter stake increase is currently only one among many proposals by the RBI working group, although the odds of the regulator making this one a rule is high. After all, there is a precedent in the case of Kotak Mahindra Bank Ltd.
To be sure, IndusInd Bank’s capital adequacy ratios are comfortable. As of September, its common equity tier-1 capital was 14.5%, comfortably higher than the regulatory requirement of 5.5%. The total capital adequacy ratio was 16.55%, much higher than the 10.5% requirement.
But in the face of increased stress on its loan book, big chunks of profit goes towards provisioning against expected losses. This leaves less capital for growth purposes.
Another key ingredient for growth is sustained deposit growth. Here, the lender took a knock after Yes Bank Ltd’s troubles surfaced, but has since then shown marked improvement. The 9% sequential growth in low-cost current and savings account (CASA) deposits in Q2 augurs well. “A combination of asset consolidation and aggressive push for CASA should help revert to growth from FY22 onwards," wrote analysts at Jefferies India Pvt. Ltd in a 30 October report.
But despite recent sharp gains, the lender’s shares lag behind the sector index by a huge margin. This shows investors want proof of the pudding. IndusInd Bank will need to show growth closer to its historic levels for valuations to improve.