IndusInd Bank Ltd has had a difficult first half in FY20. The bank’s shares have shed more than 15% since April, reflecting the deceleration in the bank’s balance-sheet growth.
The auto sector pain has indeed been the culprit behind the sharp slowdown in loan growth.
Will the lender bounce back to its heydays of high growth?
While the 30-35% growth rates seen in earlier years are unlikely soon, the bank is expected to arrest some of the slowdown. Analysts are confident that IndusInd Bank can salvage its loan growth considerably. This faith comes after the lender made a presentation detailing strategy for each vertical to analysts earlier this month.
IndusInd Bank is targeting 18-20% growth in vehicle finance, which forms more than a quarter of its loan book. But it also wants to grow its non-vehicle loan book at 24% over the next three years on a compound annual growth rate basis.
Here, the microfinance book will play a key role. The private sector lender’s merger with Bharat Financial Inclusion Ltd took effect in July this year and it has had a mixed impact on IndusInd Bank’s balance sheet. Bad loans have gone up as a proportion of the loan book in contrast to the bank’s long-standing record of having low bad loan ratios. For the September quarter, gross bad loans made up 2.2% of its loan book.
But the microlender was swallowed with an intent to not just diversify but also grow the loan book. Analysts believe this segment would be a key growth fillip in the coming quarters.
Further, the bank wants to boost its fee income too by targeting selling to high net-worth individuals. All the above factors would contribute to an increase in the bank’s operating profit.
But analysts have not taken their eyes off asset quality. Here the picture is mixed. The corporate stress watch-list stands at about 1% of the lender’s loan book. This could reduce, said analysts at Emkay Global Financial Services Ltd.
“The resolution of two IL&FS-SPV exposures of ₹800 crore could meaningfully cut NPAs by Q4. Vodafone exposure remains a concern, though it assigns a lower default probability as of now," the brokerage firm said in a note. IL&FS-SPV stands for special purpose vehicles of Infrastructure Leasing & Financial Services Ltd.
But some such as HDFC Securities Ltd are still concerned over slippages. “We are a bit wary of IndusInd Bank’s exposures to stressed groups and companies. We model slippages of 2.3% and (loan loss provisioning) LLPs of 1.4% over FY20-22," the brokerage firm said in a note.
It is clear that IndusInd Bank’s investors will allocate more brownie points for the stock once both growth and asset quality concerns reduce. Until then, the multiple of about twice its estimated book value for FY21 appears reasonable.