IndusInd Bank : Count on it

Demonetisation has left the banking sector saddled with more challenges. While it is still early days to gauge the full impact of the Centre’s move, it is clear that new credit offtake will be impacted. Overall loan growth for the sector has already slipped to a meagre 5 per cent. Also, concerns of possible rise in delinquencies, surge in costs and pressure on margins due to sharp fall in lending rates (particularly driven by influx of deposits post demonetisation), warrant a cautious approach to stock selection.

Investors should stick with banks that continue to show steady rise in earnings, thanks to a good traction in loans, healthy margins and low slippages.

IndusInd Bank has been consistently delivering healthy growth in earnings — of 25-30 per cent in the last couple of quarters. This predictability in earnings, amid the weak performance of public sector banks and a few other large private sector banks, has kept investor interest up in the stock.

The stock currently trades at about 3.3 times its one-year forward book against its three-year historical average of about 2.8 times. The premium valuation is justified, given that IndusInd remains among the top performing banks.

The healthy performance in the latest December quarter, despite overhang of the cash crunch in the economy, is a key positive. The bank’s well-diversified loan portfolio leading to minimal disruption in credit off-take, higher proportion of fixed rate loans cushioning margins, and stable asset quality, should continue to keep its earnings in good stead.

Demonetisation has led to a high accretion of bank deposits. The withdrawal of legal tender character of old ₹500/1,000 notes from November 9, and subsequent caps on drawing out money from banks and ATMs, have left banks flush with deposits over the past two months. From 9-10 per cent levels (pre-demonetisation), bank deposits have grown by around 15 per cent (year-on-year) at the overall sector level.

IndusInd Bank’s deposits that were already growing at a robust pace, got a fillip. Deposits grew by 38 per cent y-o-y in the December quarter, with savings deposits shooting up by 56 per cent.

This triggered a notable fall in deposit rates and, hence, cost of funds. In the December quarter, cost of funds fell by about 25 basis points sequentially. While some of this increased liquidity will move out of the banking system, once currency flow normalises, at least 20-30 per cent is expected to remain within the system. This augurs well for IndusInd Bank, as cost of funds would continue to move lower.

In particular for IndusInd Bank, the key positive in a falling rate scenario is its higher proportion of fixed rate loans. With the introduction of the marginal cost of funds based lending rate (MCLR) last April, banks have been forced to pass on sharper rate cuts, impacting margins. But for IndusInd, 70 per cent of its loans are under fixed rate structure, which helps cap the fall in yields, aiding margins. In the latest December quarter, the bank’s net interest margin remained stable at 4 per cent.

IndusInd’s stable margins can be attributed to its strong growth in high yielding retail segments. The bank has been able to grow its loan book by 25-30 per cent over the last couple of quarters, led by both the corporate and retail segments. In the December quarter, the bank’s loan book grew by 25 per cent year-on-year, way above the muted 5 per cent growth at the system level.

Within the retail segment, over a third of loans for IndusInd comes from commercial vehicle financing. One of the largest financers of commercial vehicles in the country, this segment has grown by 10 per cent in the December quarter, despite concerns of a slowdown owing to cash-crunch. After clocking 33 per cent in 2015-16 and 14.9 per cent in the September quarter, the growth has moderated, but the management indicated some pick-up during the end of the quarter.

The bank’s diversification into other segments such as car loans, credit card and loan against property — over the past couple of years — has helped it offset some of the slackness in the commercial vehicle business. These segments have continued to witness strong growth in the December quarter as well.

The corporate book in itself is well diversified with the largest single exposure capped at 5.9 per cent to the gems and jewellery sector. This mitigates concentration risk.

The bank’s bad loans have also been under check. The gross non-performing assets (GNPA) stood at 0.94 per cent of loans as of the December quarter. Restructured assets as a proportion of loans are also low at 0.41 per cent.

Strong loan growth, steady margins and low delinquencies have kept the bank’s return ratios in good stead.

Return on asset stood around 1.8 per cent and return on equity at about 16 per cent as of the December quarter.

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