..... . VALI disclosures . .....: 03/02/25, IndusInd Bank Quarter3 Result & Analysis

Monday, February 3, 2025

03/02/25, IndusInd Bank Quarter3 Result & Analysis

IndusInd Bank (IIB, CMP: Rs 1009 Market Cap: Rs 78,656, Rating: Overweight) had a weak Q3FY25 with tepid business growth, fall in net interest margin, and a higher slippage to NPAs (non-performing assets), principally all stemming from the ongoing asset quality challenges in the micro-finance space. However, the good news is that incremental stress in micro-finance seems to be peaking out and should start reflecting from Q1 of FY26.

Q3 FY25 – a weak quarter

Source: Company

While the pre-provision operating profit growth was flat sequentially, core operating profit (excluding trading gains) declined by close to 5 percent sequentially due to higher trading gains in the quarter.

Loan growth continues to feel the heat

IIB's loan growth momentum decelerated with loans growing 12.2 percent YoY and 2.7 percent sequentially. The bank is growing its book in a calibrated manner given the challenges in the unsecured businesses. Vehicle finance as well as micro-finance disbursements, however, were sequentially better.

Source: Company

Given the strain in the high-yielding pockets, the bank has slowed down on high cost deposits, resulting in an elevated credit-to-deposit ratio of close to 90 percent. We therefore do not see loan growth gaining traction in a hurry.

De-focusing on costly deposits

In view of the slack in loan growth, especially in the unsecured high-yield business, the bank is growing its deposits cautiously, de-focusing on high cost deposits, to protect its interest margin. While overall deposits de-grew, retail deposit mobilisation was healthy with 4 percent sequential and 14 percent YoY growth. The share of retail deposits improved sequentially by 200 basis points to 46.1 percent. The bank deliberately de-focused on wholesale deposits. Because of some outflows from the Current Account, the low-cost CASA share also declined quarter over quarter by 100 basis points to 35 percent. Deposits will continue to remain an area of focus.

Source: company

Margin under pressure

Thanks to the improving composition of deposits, the sequential increase in the cost of deposits was restricted to 3 basis points. However, due to the decline in the yield on advances thanks to the compression in retail yield because of lower unsecured, the interest margin of the bank saw a huge decline of 15 basis points sequentially.

With a large fixed-rate book, the bank stands to gain in the event of a rate cut, once the situation on the ground for micro-finance improves.

Source: Company

Slippage remains elevated

The overall slippage to NPAs remains elevated and were sequentially higher. In addition to retail – mostly from the vehicle book and micro-finance; there was a slippage from the corporate book of Rs 281 crore, mainly contributed by one restructured real estate account. Thanks to the higher write-off of Rs 984 crore, the gross and net NPA stood at 2.25 percent and 0.68 percent respectively with a provision cover of 70 percent.

Source: Company

While slippage may remain elevated in Q4 on the back of micro-finance stress, there are some emerging green shoots. The 30-90 Day Past Due (DPD) book in micro-finance was stable at 4 percent against 4.1 percent in the previous quarter. The incremental stress in micro-finance seems to be peaking out as seen in reducing forward flows from 0-DPD customers. With stricter rules in place and a gradual reduction in the over-leverage situation, an improvement is likely from FY26. The overall Special mention accounts (overdue 30 to 90 days) is now 20 basis points of assets compared to 33 basis points in the previous quarter, indicating lower stress formation.

The quarter also saw subdued performance on core fees, reflecting lower retail disbursements in a few pockets although overall the bank has kept a tight leash on costs.

While the RoA has dropped to little over 1 percent, so has been the contraction in the valuation multiple. We see the bank limping back to normalcy a few quarters down the line. Aggressive long-term investors should start adding the stock.

Source: Company, Moneycontrol Research

Key risks: Severe macro slowdown impacting growth and asset quality

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Trade Cycles

The four important features of Trade Cycle are (i) Recovery, (ii) Boom, (iii) Recession, and (iv) Depression!

The trades cycle or business cycle are cyclical fluctuations of an economy. A full trade cycle has got four phases: (i) Recovery, (ii) Boom, (iii) Recession, and (iv) depression. The upward phase of a trade cycle or prosperity is divided into two stages—recovery and boom, and the downward phase of a trade cycle is also divided into two stages—recession and depression.

Phases of Trade Cycle:

The phases of trade cycle are explained with a diagram:

(1) Recovery:

In the early period of recovery, entrepreneurs increase the level of investment which in turn increases employment and income. Employment increases purchasing power and this leads to an increase in demand for consumer goods.

As a result, demand for goods will press upon their supply and it shall, thereby, lead to a rise in prices. The demand for consumer’s goods shall encourage the demand for producer’s goods.

The rise in prices shall depend upon the gestation period of investment. The longer the period of investment, the higher shall be the price rise. The rise of prices shall bring about a change in the distribution of income. Rent, wages, interest do not rise in the same proportion as prices.

Consequently, the margin of profit improves. The wholesale prices rise more than retail prices. The prices of raw materials rise more than the prices of semi-finished goods and the prices of semi-finished goods use more than the prices of finished goods.

(2) Boom:

The rate of investment increases still further. Owing to the spread of a wave of optimism in business, the level of production increases and the boom gathers momentum. More investment is possible only through credit creation. During a period of boom, the economy surpasses the level of full employment and enters a stage of over full employment.

(3) Recession:

The orders for raw materials are reduced on the onset of a recession. The rate of investment in producers’ goods industries and housing construction declines. Liquidity preference rises in society and owing to a contraction of money supply, the prices falls. A wave of pessimism spreads in business and those markets which were sometime before sellers markets become buyer’s markets now.

(4) Depression:

The main feature of a depression is a general fall in economic activity. Production, employment and income decline. The prices fall and the main factor responsible for it is, a fall in the purchasing power.

The distribution of national income changes. As the costs are rigid in nature, the margin of profit declines. Machines are not used to their full capacity in factories, because effective demand is much less. The prices of finished goods fall less than the prices of raw materials.

✳Reality Tips to Traders

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..BANKING TERMINOLOGY

There are various types of Banks: PSU Banks, Private Banks, Co-operative/Regional Banks, Small Finance Banks and Foreign Banks. When you deposit money in a bank, let's say the bank gives you an interest rate of 4%. But when the bank lends out this money, they lend it out at say, 12%. The difference of 8% in the above scenario is effectively the profit of the bank! The loans that do not pay interest for 90 days are known as Non-performing Assets. Banks have to provide for such bad loans. Structure of a Bank Asset for a Bank: The asset portion of a bank's capital includes cash, government securities, and interest-earning loans (e.g., mortgages, letters of credit, and inter-bank loans). Liabilities for a Bank: The bank's main liabilities are its capital (including cash reserves and, often, subordinated debt) and deposits. The latter may be from domestic or foreign sources (corporations and firms, private individuals, other banks, and even governments). Banks are required to maintain Liquidity with the Reserve Bank of India: SLR (Statutory Liquidity Ratio): It is the money a bank needs to preserve in the form of cash, gold or government Bonds before providing credit customers. This limitation is added by RBI on banks to make funds available to customers on-demand at your earliest convenience. Banks are required to maintain SLR at 18%. CRR (Cash Reserve Ratio): Banks are required to hold a certain proportion of their deposits in the form of cash. Banks don’t hold these as cash with themselves, but deposit such amounts with RBI / currency chests. CRR rate is at 4.5% currently. Repo Rate: The rate at which the RBI lends short-term money to the banks. The RBI through its Monetary Policy committee changes the repo rate to balance growth and Inflation. Reverse Repo rate: The rate at which banks park their short-term excess liquidity with the RBI. Now let us understand various terminologies for Banks Net Interest Income (NII): This is the spread the bank makes on its lending. It is calculated as Interest Income – Interest Expended Net Interest Margin (NIM): This is the spread the bank makes on its lending. It is the earning which is left after deducting the cost paid to depositors from its yields on Loans. This is denoted in % terms. The formula is Yield on Loans – Cost of funds Capital Adequacy Ratio (CAR): The capital adequacy ratio (CAR) is a measure of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures. Essentially, it is the Capital that is available to lend. Tier I Capital – In simple words this capital is freely available with the bank to lend out. Tier II Capital- This is the capital tied up somewhere and is less freely available to lend. In case of an adverse event, the bank can use this capital to lend. Under Basel III norms, a bank’s tier 1+tier 2 capital must be a minimum of 8% of its risk-weighted holdings. The minimum capital adequacy ratio, also including the capital conservation buffer, is 10.5%. Current Account Saving Account (CASA)- There is no interest paid on the Current Account and a small interest rate is paid on a savings account. The combination of both is called CASA which shows the liabilities of the bank on which it pays relatively less interest. Deposits: Bank deposits are a savings product that customers can use to hold an amount of money at a bank for a specified length of time. In return, the financial institution will pay the customer the relevant amount of interest, based on how much they choose to deposit and for how long. Now let us come to NPA. Gross NPA (GNPA): It is the total loans on which no payment has been paid for 90 days or more. GNPA % is usually shown in each Bank’s quarterly results. The percentage is basically the GNPA amount as a % of the total advances. Slippages: Slippages denote the fresh amount of loans that have turned bad in a year. The slippage ratio of a bank is calculated as Fresh accretion of NPAs during the year /Total standard assets at the beginning of the year multiplied by 100. Provisioning Coverage Ratio (PCR): This is the ratio of provisioning to GNPA and indicates the extent of funds a bank has kept aside to cover loan losses. For Instance, a company has GNPAs of Rs 100 and they have set aside 50 Rs, then the PCR is 50%. Net NPA (NNPA): The total figure left after deducting provisions made for bad loans from GNPA. (GNPA – Provisions+upgrades/writeoffs = NNPA) Special Mention Account (SMA) SMA-0 is a category in which stress with respect to the principal and interest has remained overdue for a period of 0 to 30 days. SMA-1 is a category in which stress with respect to the principal and interest has remained overdue for a period of 30-60 days. SMA-2 is a category in which stress with respect to the principal and interest has remained overdue for a period of 60-90 days

..... . VALI disclosures . .....

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Monday, February 3, 2025

03/02/25, IndusInd Bank Quarter3 Result & Analysis

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