IndusInd Bank shares volatile again

  IndusInd Bank share price nosedives

I. IndusInd Bank (INDB) share price decline sharply: The price came down by Rs.245 (roughly by 28% of the previous day’s closing price of Rs.900), in the stock market on 10th March 2025, after the bank disclosed that due to discrepancies noticed in  the derivatives portfolio during internal review processes, the net worth of the bank may have an adverse impact of 2.35% (app. Rs.1500 cr.). The impact is more than the net profit reported in Q3FY25 and if adjusted with the net profit for the nine months ended Dec'25, the decline in the net profit in 9MFY25 (as compared to 9MFY24) is nearly 50%. Incidentally, this is not the first time (not likely to be the last time as well) that the bank's share price in the stock markets dropped by a huge margin. In 2018, when INDB announced its decision to take over Bharat Finance Inclusion Ltd (BFIL), as a wholly owned subsidiary, the share prices suffered a low. The share price since then touched around Rs.1700 level, but came down sharply during the onset of COVID. The price, which recovered to Rs.1100 levels afterwards, again dropped, when there were allegations from the then employees of BFIL in Nov 2021 that the subsidiary is resorting to 'evergreening' of loans. (BFIL, after merger with INDB, has become a business correspondent of the bank, disbursing loans, sourcing liabilities and managing the bank's assets. Incidentally the present MD & CEO of INDB was at the helm of affairs during that period also). In the present episode, the only thing that could be verified, in the public domain, is that the forex derivatives exposure had the backing of central counterparty, collateralised arrangements and counter bank guarantees  to cover 84% of the portfolio with the rest being defined as exposure against 'other counterparties'.

II. INDB is not alone in the decline in the share price in the market: The deep decline, though not in a matter of days, but over a short period is a phenomenon that is witnessed in the share price of some other banks also. 

To quote a few, (with the price trending around the lower level now)

Bandhan Bank (Between Rs.222 and Rs.128), DCB Bank (Between Rs.146 and Rs.101), RBL  (Between Rs.264 and Rs.155), Ujjivan SFB (Between Rs.56 and Rs.30), Equitas SFB (Between Rs.108 and Rs.54), IDFC First (Between Rs.86 and Rs.53). 

(I did not compare the market value of the shares of PSBs for the simple reason that their liabilities and assets are still dominated by the traditional methods of sourcing and deploying)

III. Underlying Liabilities and Assets play a major role to determine whether the share price will be steady or volatile: This is my firm belief. From the Q3FY25 presentation given by INDB, one can understand that the focus of the bank always has been to maximise shareholders value and the composition of the balance sheet confirms that: 

A few parameters from the balance sheet are:

Deposits and Borrowings:

• Retail Deposits constitute just 46% of its total deposits of Rs.4.09 lac cr.
• Though CASA is 35% as on the particular date, nearly one third of it came from the less stable CA(Current Account). The increase in CASA was just 1% as compared to 18% increase in the term deposit portfolio
• Cost of Deposit consequent to the above concentration is higher at 6.58%
• Borrowings account for more than 10% of the total outside liabilities  

Advances: 

• Vehicle loans forms 25% of the total loans.
• Micro finance is 9% of the outstanding loans
• Credit cards is 3% of the outstanding
• While loans against property is 3%, the home loan portfolio is just 1%
• In the corporate loans portfolio, A and BBB rated loans, where higher interest income is possible, account for 44% of the total.
• All the above enable the bank to keep the yield on advances higher at 12.21% with the retail credit portfolio alone accounting for 14.89%
• Non fund based business, in the form of LCs and BGs at Rs.81,264 cr., is nearly 25% of the total fund based outstanding and contributes in a major way to the accretion in non-interest income. However, this NFB portfolio, of course,  throw open the default risks by the borrowers, forcing the bank to meet the claims upfront in case of defaults. 

When a bank has a composition of balance sheet skewed towards high yielding advances and when it also goes for aggressive lending, (the CD ratio of INDB is 90%), it may not always succeed in sourcing funds in the form of deposits and that too at lower costs. Again high yielding also implies the associated high risk. When the interest rates on lending is lowered, when the stress in advances build up, though it may not pose any immediate danger, the net profit and the associated ratios are bound to be lower as compared to market expectations. (And sometimes the pressure to postpone the 'real picture' also happens, which is the present allegation about the present episode). This explains the high fluctuations in the share prices of some of the banks, I compared in para II above. 

IV. The tenure of the present CEO: Reserve Bank of India (RBI) last week approved the reappointment of the existing CEO for one year, as against the bank board's recommendation for three years. There were newspaper reports suggesting that the regulator may prefer a public sector banker to head INDB, when the present CEO's extended tenure comes to an end or earlier, as currently six private sector banks are headed by those, who held senior/top positions in public sector banks.  If that becomes true, what will be the impact on the share price of INDB? Interestingly, it is observed that the share prices of the relevant banks tend to move in tandem with the business results and whether the new heads chose to change the business model or retain the composition of the assets and liabilities to a major extent.  (The share price movements of Yes Bank and RBL in the last three years might provide an answer).

Regards

V.Viswanathan

CGM Retd e-SBT 

16th March 2025