Reasons behind the downfall of IndusInd Bank Share Price

IndusInd Bank established in 1994, has grown dynamically as an organization driven by a sincere zeal to provide its customers with a range of banking and financial services at par with the highest quality standards in the industry. The IndusInd bank boasts of an integrated branch network spread across the country as well as an office in Dubai and London.

IndusInd Bank has been ranked amongst the top 5 private sector banks in India.The stock was a favorite not only among domestic traders but even foreign investors. A year back it traded at nearly four times its estimated book value for FY19. However the dream run is over as Indusind bank shares price have lost miserably in the past year and the lender now trades at a far more modest valuation multiple of 2.7 times estimated book value for FY20. 

Close on the heels of the Yes bank fiasco, and the ensuing fear among depositors seem to have affected several private banks, with large customers withdrawing deposits despite multiple assurances from the Reserve Bank of India (RBI). The bank’s deposit base has witnessed a 7% shrinkage for the March 2020 quarter due to the withdrawals triggered by the Yes Bank crisis

Despite IndusInd’s assurance, investors are still jittery and the stock plunged from ₹1579 in the first week of Dec 2019 to at an intraday price of  ₹410.40 on BSE as of 13th April 2020. If one has to evaluate this sudden fall we can only attribute it to the following reasons. 

1. The Yes Bank Fiasco -The Indusind bank share price fell on the back of bad loan rumors and market speculations against Indusind Bank especially in the wake of suffering that Yes Bank shareholders had to undergo. This has led to a panic situation for domestic investors. Banking analysts think the collapse of Yes Bank and its eventual hurried takeover is taking a toll on65ew` other private banks. Yes, Bank was rescued by a government-led bailout after years of mismanagement and careless lending by former CEO, Rana Kapoor. 

2. Corporate Debt exposure - One of the factors possibly worrying investors could be the chances of some large accounts turning bad in IndusInd Bank's corporate book. IndusInd was one of the banks which had significant exposure to IL&FS, of around Rs 3,000 crore. With no recovery in sight, this exposure has been provided for over quarters aggressively. The other grey area is the bank's exposure to the telecom sector. The Supreme Court’s announcement that the self-evaluation of adjusted gross revenue (AGR) dues by telecom companies was a violation of its order. This added to investor worries owing to IndusInd’s exposure to Vodafone Idea at ₹3,400 crores... 

3. FPIs swimming against the tide - Foreign portfolio investors (FPIs) have lapped up Indusind Bank share price even as domestic investors rushed to exit the counter during the market crash. In the first week of April, FPIs raised their holding in Indusind Bank to 72.07 percent from 55.22 percent that they held at the end of December 2019, data from depository company NSDL showed. A major portion of this 16.85 percent hike in stake by FPIs in Indusind Bank came during February and March. This was when the markets were witnessing their worst fall since the 2008 financial crisis.

4. A shift of deposit base - IndusInd Bank Ltd deposit base has been eroded by nearly 2% as some state governments shifted deposits from the private lender.

5. Sectoral exposure -IndusInd Bank’s slippages were on the rise in the December quarter and gross bad loans formed 2.18% of the loan book, far higher than the 1.08% two years ago. Roughly 21% of the bank’s loan book is to midsized and small businesses, a pain-point for it. The current quarter has been brutal for midsize and small businesses owing to the economic slowdown and the coronavirus outbreak. The bank’s large exposure to the automobile industry through vehicle loans (as much as 28% of all loans) is not helping either, given the protracted slowdown in the auto sector.

Control measures in place

1. The bank’s promoter, the Hinduja Group, is awaiting RBI’s decision on its plan to raise the promoter stake to 26%. They intend to pump in ₹2700 crore via warrants post the merger of Bharat Financial with IndusInd.The merger and subsequent promoter infusion will push the capital base by $1 billion and the capital buffers would increase by 3 percentage points through this.

2. IndusInd is in the midst of a management shift as incumbent chief executive Romesh Sobti has made way for Sumant Kathpalia from 24 March. Kathpalia has been instrumental in building the bank's consumer loan book and investors are confident about his ability to lead the charge. He is excellent in execution and strategy and has been instrumental in the bank's digitalization drive as well.

3. IndusInd Mauritius which is the promoter of IndusInd bank has pledged 23.8 million equity shares of IndusInd bank which are equal to 26.33 percent of the promoters holding in favor of Citibank London against borrowing arrangements it had availed in September 2016.

4.  The December quarter gross non-performing asset (NPA) ratio was at 2.18%  and they are expected to stay pretty much in line with that for the March quarter too.

Despite these turbulences that have hit the bank, Induslnd remains focussed on building scale with profitability, on a platform of strong capitalization, liquidity, and high credit ratings. In this regard we can study synopsis of the Bank’s profile and latest quarterly financial results as of December 31, 2019 by way of further amplification.

• Amongst the large peer private sector banks: - The bank ranks in the top 3 in terms of the metrics for revenue growth, deposit growth, net interest margin, pre-provision profitability, a stable loan book with the second-lowest Gross NPA percentage

• In several product categories such as Commercial Vehicles, Microfinance, Gems & Jewellery' they are among the top 3 market players. The quality of these portfolios is stable and better than the industry.

• Over 40% of the Bank’s Loan Book is devoted to small ticket “livelihood loans” helping customers mostly in rural and semi-urban areas earn a livelihood through micro & small business finance.

• Induslnd has grown to about 5,000 distribution points serving a customer base of 25 million through 30,000 employees; earning recognition as “Dream Employer of the Year '' and various awards for banking innovation.

• It is currently well-capitalized with a CRAR of 15.43%, maintaining a liquidity coverage ratio between 100% to 120% daily and the entire top management remains solidly committed, under the new leadership, to drive sustainable growth and maintain a fundamentally strong institution.

Going ahead, the management under the aegis of Sumant Kathpalia should focus more on balance sheet realignment rather than growth. The immediate priority is to consolidate and build resilience. The Banking sector which is already reeling under the impact of low credit growth will now be hit by asset woes post the Covid lockdown impact.