The fact that IndusInd Bank shares have easily beaten the sector indices in terms of gains over the last six weeks should not be a surprise anymore. The private sector lender’s results for the September quarter showed enough improvement to cheer investors, starting with a net profit growth of 26% to Rs704.25 crore and an all-time high net interest margin of 4%.
Since 1 September, its shares have risen 3.19% while banking indices fell by 2%. Clearly, the run-up to its results release has been in anticipation of stellar numbers.
What makes IndusInd Bank such an attraction for investors?
Besides an improvement in its net interest margin for the eighth straight quarter, the bank reported a loan growth of 26% and said the growth emerges primarily from its high-yielding retail portfolio. This, along with an improving low-cost current account and savings proportion of deposits, has added 12 basis points to the margins during the quarter. A basis point is 0.01%.
The 22-year-old lender’s net interest income clocked a growth of 33% to Rs1,460.31 crore while non-interest income grew by 24% to Rs1,094.28 crore.
An efficient lender is often rewarded, especially in the banking sector awash with inefficiency in both lending and cost management. IndusInd Bank continued to maintain the health of its loan book with asset quality metrics largely unchanged. Gross non-performing assets (NPAs) as a percentage of total loans stood at 0.91% at the end of the September quarter, little changed from the previous quarter. But gross NPAs rose 4.4% sequentially to Rs899 crore at the end of September because of one account, said the management.
A diversified loan book, growing low cost deposits and a steady asset quality puts IndusInd Bank in a sweet spot. But at a price-to-book value of 4.2 times earnings of FY16, is it too hot to handle? Analysts have recommended a buy rating even at these valuations.
Here is a thread of caution. The lender was expecting relief from the Reserve Bank of India (RBI) on its exposure to Food Corporation of India. RBI had mandated all banks to make 15% provisioning against this exposure. This shows up in the 35% jump in the provisions of IndusInd Bank. And, despite a diversified book, the lender still relies on a robust performance of the commercial vehicles market.