IndusInd Bank wins consistency game but some red flags show

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IndusInd Bank Ltd ticked all the right boxes in the quarterly results list with consistent growth in net profit and core revenues for the second straight quarter. The bank’s net profit grew by 25% to Rs880 crore for the three months ended September on the back of a strong 25% growth in core income and was in line with Street estimates.

The private lender also didn’t disappoint on industry-beating loan and deposit growth of 24% and 26%, respectively for the three months ended September. In fact, IndusInd Bank saw a record quarter in terms of disbursement in commercial vehicle loans, the bedrock of its consumer finance segment. Commercial vehicle loans grew at 13% year-on-year and other segments too showed a healthy growth. This disbursement surge has helped the lender diversify its loan mix to a reasonable corporate to retail ratio of 53:47.

At a time when corporate credit demand is almost comatose, IndusInd Bank has managed to grow its book by 26% from the year-ago period. It has also kept its asset quality from weakening, which indicates that the quality of borrowers is good. Bad loan ratios, both on a gross and net basis, have remained unchanged from the previous quarter. Investors begin to expect similar growth every quarter and the lender has perfected the trick to not disappoint them.

The bank’s talks with microlender Bharat Financial Inclusion for a merger are on and the marriage will help in further diversifying the loan book of IndusInd Bank. Managing director Romesh Sobti stressed again that the bank is targeting an increase in the share of microfinance to 6% over the next three years from the current 2.18%.

The bank maintained its net interest margin at 4% helped by the sharp jump in the proportion of low-cost deposits. Considering that the deposit deluge in the aftermath of demonetization has run its course, the massive 95% surge in savings account deposits of the private lender comes as a pleasant surprise. While it would be prudent to not expect a growth close to this in the coming quarters, the benefit of the rise in low-cost deposits on margins cannot be ignored.

Analysts believe these are reasons enough to have a buy rating on the bank even though the stock trades at a rich multiple of 4.4 times the estimated book value for fiscal 2018.

It would be good to look at potential problems as well. For starters, the record growth in commercial vehicle loan disbursements can hardly hold since it stems from a low base. Further, the bank has exposure to nine out of the 40 troublesome accounts listed by the Reserve Bank of India (RBI) to be resolved immediately or referred under the Insolvency and Bankruptcy Code (IBC). The bank has made adequate provisions but eventual haircuts will need to be monitored.

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