Investors in IndusInd Bank Ltd are notably disheartened by the private lender’s recent performance. So far this calendar year, the stock has tumbled by 11%, contrasting sharply with sector indices Nifty Private Bank and Nifty Bank, which have climbed 5% and 8%, respectively. The provisional operational update for the June quarter (Q1FY25) offers little solace, signalling that a significant recovery in stock returns remains elusive.
Year-on-year, loan/credit growth reached 15.5%, while deposits rose 14.8%. Tepid loan and deposit growth translated into a moderation in CASA (current account and savings account) ratio to 36.7% in Q1FY25. As a result, the bank’s net interest margin (NIM) would suffer. But that’s not all.
“IndusInd Bank increased its retail term deposit rates (one-three year bucket) by around 50 basis points over December 2023 to June 2024, and the impact of that could also be seen on NIMs in Q1FY25, ” Nomura Financial Advisory and Securities (India) said in a report dated 5 July. One basis point is one-hundredth of a percentage point.
In the March quarter (Q4FY24), the bank saw an uptick in the cost of deposits. However, it maintained a margin of 4.26% due to a favourable loan mix. Then, the management had said that it expects the cost of deposits to stabilize and it aims to maintain margin in 4.2-4.3% going ahead. On the bright side, a chunk of IndusInd’s loans is on a fixed rate cycle.
“So, eventually when interest rates would start to be cut by the Reserve Bank of India, IndusInd is likely to be the least impacted when it comes to margin compression,” said Veer Trivedi, senior manager-equity research at Kotak Securities.
IndusInd Bank is not alone in its struggle to secure low-cost deposits and maintain margins; many banks face similar challenges. According to an Axis Securities report, part of the growth slowdown may be attributable to the seasonal weakness typically observed in Q1.
Other critical factors to monitor include asset quality trends, particularly in the retail segment. The bank has meaningful exposure to commercial vehicles (CV) and microfinance institutions (MFI) lending.
Business trends seen in MFI are usually cyclical in nature. There have been concerns that due to heatwaves and general elections, some banks, including IndusInd, could see increased stress in their MFI portfolios. If this plays out then, provisions in Q1FY25 could increase due to higher slippage.
It is worth noting that the bank has contingent provisions of ₹1,000 crore as a cushion for any volatility in MFI and CV segments. Further, an additional 2% of extra provisions were aimed at the microfinance segment and 0.5% extra on the MHCV (medium and heavy commercial vehicles) in the forthcoming quarters.
Apart from that, slippages in the bank’s credit card portfolio are elevated and need monitoring. In its Q4FY24 commentary, the management had said that they made a cautious choice to slow down disbursements in unsecured products like credit card and personal loans. The management’s views in Q1FY25 earnings commentary on the same will be important.
Beyond earnings, news about the Hinduja Group, the bank’s promoters, has also pressured the stock. Even as the promoters have received permission from the Reserve Bank of India to increase stake from 15% to 26%, it remains pending as the promoters are busy closing the Reliance Capital acquisition deal.
Meanwhile, the bank has maintained its guidance of 18-23% loan growth for the current planning cycle of FY23-26, driven by improved lending across segments. Achieving these targets will be crucial for the stock’s prospects. Against this backdrop, the bank’s focus on digital initiatives, capacity building, and distribution to enhance its retail loan book will likely keep medium-term operating expenses elevated.
