Why IndusInd Bank Stock Is Falling?

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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.

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.

Detailed Stock Analysis by Invest Yadnya
Detailed Stock Analysis by Invest Yadnya

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

Why IndusInd Bank Stock Is Falling?
Why IndusInd Bank Stock Is Falling?
  • 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

IndusInd Bank – Cascading Effects of Deposits Erosion by 10%
IndusInd Bank – Cascading Effects of Deposits Erosion by 10%
A. Short-term Toggle Between Deposits & Borrowings
  • IndusInd Bank’s Deposits are eroded by almost 10-11% as compared with Q3 FY20.
    1. 2/3rd of Deposit Fall is Due to Government Related Accounts after the collapse of Yes Bank
    2. 1/3rd 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
IndusInd Bank - Risk of Tumbling the Balance-sheet Due to Recalibration of Deposits
IndusInd Bank – Risk of Tumbling the Balance-sheet Due to Recalibration of Deposits

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)

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