IndusInd Bank gets market attention on beaten down valuations

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IndusInd Bank’s fortunes seem to have gotten better with the stock bridging its performance gap vis-a-vis the sector index off late.

The private sector lender’s share price has gained a massive 25% in the last one month, helping it reduce its underperformance with the Nifty Bank index. To be sure, despite these recent gains, the bank’s share performance still trails that of the sector index so far in FY21 and is still down 58% year-to-date.

A lot of this recent investor optimism has to do with the bank successfully raising 3288 crore capital through a qualified institutional placement. The fact that the bank’s promoters were more than willing to increase stake was also a positive.

That said, whether investors would remain warm to IndusInd Bank would depend largely on how it navigates the pandemic’s lasting impact. The lender’s first quarter performance was mixed but its own caution in lending stood out. Loan book growth was just 2% and the management indicated it is not chasing every borrower. The lender’s focus is now on strengthening retail liability franchise. “Lower reliance on wholesale funds & cost will support asset growth prospects with balanced risks,” wrote analysts at Jefferies India Pvt Ltd in a 9 September note.

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The bank’s deposits showed a growth of 6% for the June quarter. In a post earnings conference call, the management had stated its focus on boosting retail deposits. But deposit mobilisation may not be the big challenge for banks. In a crisis, bank deposits gain popularity as an investment option given their safety and liquidity perception in comparison to other financial assets.

IndusInd Bank’s biggest challenge is asset quality. The pile of loans the bank will have to restructure this year would be a key barometer that investors would look at. The regulator has allowed a one-time restructuring of loans hit by the pandemic and one of the options for lenders is to extend moratorium. However, the impact of the restructuring of loans won’t be visible entirely until the fourth quarter of FY21. Ergo, this low visibility is expected to weigh on bank shares and IndusInd Bank won’t be an exception.

Nevertheless, the stock could be up for rerating simply because it has been beaten down more compared with its peers. Despite the recent rise, the shares trade at a marginal discount to estimated book value for FY22. This compares with a multiple of 2.7 times estimated FY22 book value for HDFC Bank and multiple of 3 for Kotak Mahindra Bank shares. “Though we think asset quality risks for IndusInd Bank and SBI remain higher than peers, we believe current valuations reflect most negatives, driving our upgrades,” said analysts at UBS in a 27 August report.

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