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The Curious Case of IndusInd Bank!

Shares of IndusInd bank have fallen nearly 80% over the last 1 year and the fall has been accentuated over the past week

Let us see why -


LOAN EXPOSURES AS REPORTED IN Q3

  1. Due to Indusind's merger with Bharat Financial Inclusion,10% of the book is Microfinance lending(MFI). The ongoing lockdown is a major CREDIT EVENT for the Micro-Finance companies with IndusInd no exception as there will be a sharp uptick in NPAs.

  2. Even before the crisis started, the Auto sector was in really bad shape. Indusind has been really aggressive on Auto loans and 28% of the book is Autos. As the lockdown continues, the Auto sector loans run a serious risks of becoming NPAs.

  3. If that's not worrisome enough, Indusind's corporate loan exposure too has been a cause of concern

Note:-All exposures are approximate and change every quarter

The total advances stood at 2.07 lakh crores and the above corporate stressed exposures form nearly 6% of the total advances.

As reported by the bank the SMA-1 stands at 0.64% of loans and SMA-2 at 0.53% of the loans. However, there may be a sharp rise in bad loans over the coming quarters.


WHAT ARE THE UNDERWRITING STANDARDS FOR INDUSIND? Cost of funds for the bank

At 5.73%, the cost of funds is higher when compared to old age banks like SBI, HDFC Bank, ICICI Bank, etc. The bank must, therefore, chase higher yields to make up for a higher spread (NIMs) which leads them to lend to riskier clients. Over the past quarters, IndusInd Management never raised caution on the toxic environment in the economy leading to little understanding of the strategies followed by the bank.

SUCCESSION


Sumanth Katpalia has now become the CEO of the bank taking over Romesh Sobti,


However, it remains to be seen the kind of Vision he creates for the bank. PLEDGING BY THE HINDUJAS


There was a regulatory filing by Indusind bank on shares pledged by Hinduja Group for a loan.


"There was a pledge which was created a couple of years ago with Citibank", a regulatory filing said which led some panic.


The filing adds "Mauritius-incorporated IndusInd International Holdings (IIHL) is the promoting entity of IndusInd Bank, which has over 600 investors and HNIs all over the world. They are today committed with the company for more than 25 years, their NAVs have risen substantially, they also want to part exit some of these investments. We decided to list IIHL, when you list you need an operating entity. So we decided to part leverage. In 2016, we decided to pick up some stake in MauBank of Mauritius. To pay for that, we decided to pledge some shares but eventually, the sale did not happen due to pricing issues. We are still looking for more opportunities so that the entity can become an operating firm and go for listing. When you renew the document, it needs to go to Sebi and stock exchanges, but it led to more confusion. But, we have amply clarified this."


The above statements were made by Ashok Hinduja.


RBI APPLICATION TO INCREASE THE STAKE

Hindujas have applied to the RBI to increase the stake in IndusInd bank from 15% to 26%. Hindujas have gone to the extent to say they accept the stake increase even if the new shares DO NOT come with voting rights. CONCLUSION


Indusind is a new private sector bank that has and will be hit with NPAs in the coming quarters.

The fall in share price should not be construed as a risk to deposits.

However, there is little understanding of the UNDERWRITING standards for the Bank and therefore we don't cover nor have any recommendations the stock.


Disclaimer:-The author of this report is a Chartered Financial Analyst(CFA) from CFA Institute,USA,the views expressed in the above report are personal and at no point should be construed as an investment advise.Please consult your financial advisor before making any decisions.Reproduction of the above report is strictly prohibited.

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