Why IndusInd Bank Stock Is Falling?

Induslnd Bank Stock Review – Lost Value By Almost 80%

Introduction

Why IndusInd Bank Stock Is Falling? Amid the market mayhem due to COVID-19 outbreak, IndusInd Bank has taken a hard knock, losing over 80% in value from its 52-week high. Lets decode the reasons behind this huge fall in IndusInd Bank stock.

Why IndusInd Bank Stock Is Falling?

• IndusInd has been at the receiving end even since its exposure to IL&FS came to light.
• Its exposure to telecom and real estate also led to speculation on how much it would be hit.
• After the Yes Bank saga – moratorium on withdrawals, IndusInd Bank’s deposits were also hit where nearly 10% has flown out in recent days due to withdrawals by state government departments.

IndusInd Bank Lost Value By Almost 80% – Key Reasons

• Banks Deposits Eroded by 10-11% mainly due to withdraw from Government-related accounts (negative outlook towards private sector banks post Yes Bank saga)
• On the day Romesh Sobti’s term as IndusInd Bank’s MD & CEO ended after 12 years of service, the bank’s shares tanked 30%.
• The inaugural attempt by Mr. Sumant Kathpalia, New MD & CEO, in investors’ call to supress doubts triggers concerns : Divergent Statements Made on key parameters like deposit (Stable Deposits & NIM in spite of Deposit Erosion by 10%), advance growth etc.
• Promoters’ pledge of shares to fund other ventures led short sales by hedge funds

Bank’s Deposits Eroded by Almost 10-11% – Cascading Effects

A. Short-term Toggle Between Deposits & Borrowings

• IndusInd Bank’s Deposits are eroded by almost 10-11% as compared with Q3 FY20.
  1. 2/3^rd of Deposit Fall is Due to Government Related Accounts after the collapse of Yes Bank
  2. 1/3^rd of Reduction due to Corporate Accounts
• Key Element of overall chain of events are de-focusing on Bulk Deposits & Bank’s weaker deposit franchise
• How will the deposit erosion have a Cascading Impact on Bank’s Profitability Growth?
• Due to outflow of almost 10% of bank’s deposits, Bank’s CASA Ratio will reduce. CASA deposits are the key driving source for raising funds at the lower cost.
• Since Asset growth is a function of Liability (and not the other way), Bank has to recalibrate its deposit outflow.
• So, in the process of recalibration of deposits, by tapping other sources of funds (as given below), there will be significant rise in cost of funds.
• As a result, the interest expenses towards raising funds will also increase.
• It will adversely affect the bank’s Net Interest Margin (NIM) and will have a cascading impact on the profitability of the bank.

B. Recalibrating the Deposit Mix

• As per the Management call, the bank is planning to make up deposit outflow by tapping other Fund Resources as mentioned below :
  • Longer Duration Refinance
  • FX Borrowings Swapped into INR
  • Bank CDs, Term Money Borrowings
  • Repo of Excess SLRs & Non SLR Securities
  • Call Money Instruments

C. Risk of Tumbling the Balance-sheet in Short-term

Asset Quality Stress is Inevitable Due to COVID-19 Lockdown

• 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. IndusInd has about Rs.3,400 crore exposure to crisis-ridden Vodafone Idea. Telecom companies are affected by a recent Supreme Court ruling on AGR dues.
• As far as asset quality is concerned, the rising worry is the bank’s exposure to vulnerable sectors against the backdrop of the COVID-19 lockdown. IndusInd bank may find it tough to maintaining its asset quality because of the lockdown.

IndusInd Bank Stock – Key Outlook

Valuation

• The historical average Price to Earnings Ratio (PE Ratio) of the IndusInd Bank stock is 29.72. While, the current PE ratio is 5.27. The stock has corrected by almost 82% from its 52-week high since last 1 year.
• Thus, the Stock is currently trading at attractive valuation and offers a great Long-term opportunity due to recent correction.
• However, in the near term risks towards bank’s Balance sheet is inevitable due to recent deposit erosion and asset-liability realignment.

‘Overweight’ Rating By Morgan Stanley

• Rating & Target Price :
  • Morgan Stanley goes Overweight
  • However, Bank’s Target Price is lowered to Rs.525 from at Rs.1,130
• Positives Points given by Morgan Stanley :
  • Morgan Stanley maintained Overweight rating for the bank because of its Strong Capital/ Pre Provisioning Operating Profit (PPOP), Healthy Capital Position and Attractive Valuation.
• Key Risks :
  • However, there are some risks in the short-term as mentioned below due to which earnings estimates are cut by 75% for FY21 and by 35% for FY22.
  • Significant Risk to Asset Quality in near term mainly in Credit cards, Personal Loan, MFI, Real Estate/ LAP if the duration of COVID lockdown increases. RBI’s EMI Moratorium should help limit NPAs.
  • Deposit outflows will impact the growth/fee income growth.

New Growth Strategy Announced By New MD & CEO

• To Maintain Higher Provision Coverage Ratio (up to 60%) towards Stressed Accounts in FY20
• To Attain Strong Balance sheet (Due to which bank could witness weak Growth & Profitability in coming quarters)