What is bothering IndusInd investors?

In an earnings call with analysts on Wednesday, the bank’s management said it expects strong demand going forward, resulting in credit growth of 20% year-on-year (YoY) for the fiscal year. needed. In Q2 FY23, its total loan book grew 18% year-on-year, driven by an improvement in traction in the corporate and retail loan book.

More importantly, its MFI portfolio, which was a major area of ​​concern, saw better asset quality along with a 5% increase in credit growth. Management stated that RBI’s regulatory changes relating to MFIs have been fully implemented and disruption is in the past.

However, the stock’s reaction on Thursday did not reflect optimism. The bank’s shares slipped 5% on the NSE. It was also the top gainer among Nifty 50 stocks. What is bothering investors? The drying up of systemic liquidity raises questions about the sustainability of the bank’s Q2 earnings performance, especially as the cost of funds is set to rise.

“We are heading into a difficult macro-economic environment, with the repo rate likely to rise further. Krishnan ASV, Senior Vice President, Institutional Research, HDFC Securities said, “Given the tight liquidity, we also expect a desperate scramble for deposits among banks.

As there is an increasing competition among large lenders to acquire more deposits, it could weigh on IndusInd’s credit growth or margins, as IndusInd has the weakest deposit franchise among peers, Krishnan said.

Aided by a strong traction in current accounts (CA) and fixed deposits, IndusInd’s total deposits grew 4% sequentially and 15% in Q2. However, savings account (SA) deposits saw a gradual decline of around 6%, mainly due to the implementation of centralized treasury settlements in its budgeted accounts, it said. Analysts said the fall in SA is also a sign that the battle for deposits is becoming increasingly competitive.

Operating expenses were higher and its cost-to-income ratio was 44% in Q2 versus 41% in the year-ago period. It added that the increased cost was due to investment in new technology, increased appraisal cost and hiring. Management said the cost-to-income ratio is peaking at 44% to 44.2% and settling in the range of about 41% to 43%.

In Q2, the bank’s net interest income (NIM) was flat at 4.24%. The bank’s management has directed its NIM to be in the range of 4.15-4.25%.

Analysts at ICICI Securities Ltd said the problem is that nearly 50% of its advances are fixed rate and its focus on accelerating deposits by raising savings rates makes the current scenario less favorable. IndusInd has increased savings deposit rates across various buckets with effect from October 1.

Meanwhile, in 2022 so far, IndusInd Bank stock is up 24%, outperforming sector index Nifty Bank, up 10%. The sharp increase can be attributed to improving near-term comfort on the bank’s asset quality. That said, a sharp bounce from current levels is unlikely.

A tailwind of lower credit cost could lead it to a 15% return on equity (ROE) for FY23-24, said a report by Investec Securities.

However, some risks emerged in the first quarter as well. This includes credit growth led by the corporate segment and weak retail deposit growth. This, combined with the limited scope of NIM expansion, leaves Investec less confident about the sustainability and quality of IndusInd’s growth. Despite the ROE approaching 15%, the scope for further valuation re-rating is limited, it said.