IndusInd Bank (IIB) was until recently the darling of the stock market, and considered to be in the same league as HDFC Bank and Kotak Mahindra Bank. It has, however, taken a beating off late. The slowdown in the commercial vehicle sector (a sector in which the bank has major exposure), and exposure to stressed corporates have resulted in IIB’s gross non-performing assets shooting up. It is using a multi-pronged approach to counter the slowdown.
Strategy for growth
IIB merged with Bharat Financial (previously SKS Microfinance) earlier in July this year. The bank plans to set up Retail Distribution and Service Points (RDSPs) in over 160,000 villages over the next two years. RDSPs are key to unlock merger synergies with Bharat Financial. This will help the bank to cater to the banking needs of microfinance borrowers at their doorstep. It has opened ~2.7m deposit accounts of BHAFIN customers and will open another 8.4m deposit accounts by March 2020. This will help the bank to cross-sell multiple products like recurring deposits, overdraft facility and consumer durable products, etc. Bharat Finance offers microfinance loans at a rate of 19.75%, much lower than the rate offered by peers.
The bank is aggressively growing its retail deposits base and has launched new initiatives to fuel this growth. On retail deposits, IIB is focusing on affluent banking, NRI banking and Merchant & SME banking. As per the bank, this will drive ~50% of incremental growth in retail deposits over the next 2-3 years. It has increased its branch guidance to 3,000 v/s earlier guidance of 2,000.
On the vehicle loan front, IIB is witnessing a slowdown in its commercial vehicle (CV) portfolio. The Indian vehicle industry is going through its worst slowdown led by a sluggish economy. Hence, commercial vehicles are the most impacted amongst vehicle segments. IIB is combating the CV slowdown by focusing more on used-vehicles, 2Ws, cars, etc. The asset quality of its vehicle portfolio remains broadly stable across segments except for a slight deterioration in the CV segment.
On the commercial banking front, the company is seeing interesting opportunities in SME mid-market and supply chain financing. The SME mid-market segment remains significantly under-penetrated and the bank has identified focus sectors like education, logistics, hospitality, healthcare and pharma for pursuing growth opportunities. The bank earns high yields on this portfolio.
Prospects and Valuation
Overall, IIB’s loan growth is likely to remain modest, led by the slowdown in CVs and weak consumer demand. On the asset quality side, the bank continues to see robust growth in retail, SME and microfinance segments. Furthermore, the resolution of stressed assets is also progressing well. The company’s focus on increasing retail deposits should aid in reducing its credit costs.
Unlike many mid-sized banks, Indusind’s revenue base is also well diversified, with no sub-segment contributing to more than 20% of the loan book. At a valuation of approximately 2.3 times FY21 book value, IIB is certainly an interesting consideration. Investors should watch out for the upcoming management succession, which would be a key monitorable for the stock.
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