Time to move on from CEO extension debate for IndusInd Bank and focus on the fundamentals

• Extension of the tenure of IndusInd Bank’s CEO Sumanth Kathpalia has been in focus amongst the lender’s investors.
• Now that Kathpalia has received a 2-year extension, analysts at HSBC Global Research say it’s time to refocus on the lender’s fundamentals.
• Brokerages maintained an overall optimistic outlook about IndusInd Bank’s prospects due to strengthening loan growth, sustained net interest margins, and its focus on aggressive expansion in districts with high deposit growth.

IndusInd Bank’s stock has come under selling pressure recently after the lender’s chief executive officer Sumanth Kathpalia received a lower extension from the Reserve Bank of India (RBI) than what was ratified by IndusInd Bank’s board. The RBI approved a 2-year extension on March 10, while IndusInd Bank’s board had ratified a 3-year extension back in September 2022.

This spooked investors, leading to IndusInd Bank’s stock falling over 10% on March 13. So far in 2023, the bank’s stock is down 17%, steeper than the 10% fall in the Nifty Bank index.

Global brokerage Jefferies noted that a shorter extension could mean a slight pullback on growth.

“The lower tenure extension may be a reflection on the need to improve on controls (MFI incidence), liabilities (retail mix), and underwriting (retail and less risky),” Jefferies said in a note.

JP Morgan downgraded the lender’s stock to ‘neutral’ from ‘overweight’ and cut the target price to ₹1,060, from ₹1,400 earlier.

Under Kathpalia’s leadership, the lender admitted to a governance lapse in its microfinance subsidiary Bharat Financial Inclusion after a whistleblower complaint. In its December 2021 quarter earnings, the lender reported that loans were disbursed without recording the consent of clients due to a technical glitch.

IndusInd Bank noted that the impact of this incident is pegged at ₹13.5 crore, but the incident underlined a serious governance lapse. Jefferies noted that the lower tenure extension is an opportunity for Kathpalia to show progress on this front.

Analysts at HSBC echoed similar sentiments, saying, “In our view, a tenure extension slightly short of the regular three years may have come with requirements to improve certain practices and performance.”

Time to move on

Kathpalia’s extension as CEO was an event risk, according to the analysts at HSBC Global Research. Now that a decision has been made by the RBI, it’s time to refocus on the lender’s fundamentals, it said in a note.

“Now that the event risk is past, it is time to look at the bank’s fundamental performance. Its loan growth is strengthening, and its microfinance institution (MFI) disbursements are likely to improve,” the HSBC report added.

IndusInd Bank’s loan growth has improved multifold from 2.8% in FY21, to 12.4% in FY22. According to the HSBC report, the lender’s loan growth is estimated to rise to 20.5% in FY23, and sustain above 20% in FY24 and FY25 as well.

Net interest margins, another critical metric to understand a lender’s performance, is expected to sustain at 4.3% in FY23 through FY25, the brokerage added.

Analysts at Sharekhan by BNP Paribas echoed the optimism, stating that the risk-reward is attractive on the lender’s stock. The brokerage highlighted that IndusInd Bank’s loan growth has accelerated thanks to a strong portfolio of small and medium enterprise (SME) loans and vehicle finance.

“IndusInd Bank has recovered from its past challenges and has been progressing well on guided lines. Strong growth potential from a well-diversified loan book with a rising share of retail loans along with healthy capital ratios (Tier-I capital at 16.5% as of Q3FY2023) gives loan growth visibility. In the retail loan segment, vehicle finance and microfinance books are expected to be growth boosters,” said Sharekhan in its report.

Further, the bank is also investing in new areas such as affluent banking, NRI banking, tractor finance, affordable housing and merchant advances. While the industry leader HDFC Bank has been focusing on expanding its branches to within 2 kilometers of every customer, IndusInd Bank has adopted an aggressive strategy that focuses on districts with high deposit growth.

For the December quarter, IndusInd Bank’s consolidated profits jumped 58% on year to ₹1,963 crore, beating analyst estimates, on account of higher core income and lower provisions.

Outlook bullish

With the event risk of CEO extension now behind it, analysts at HSBC maintained their bullishness on the lender’s stock, adding that it looked “attractive”.

On the other hand, while Sharekhan maintained its optimistic outlook on the lender and gave its stock a ‘Buy’ rating, the brokerage maintained that a further re-rating depends on improvements in the lender’s performance on guided lines.

IndusInd Bank has guided for a net interest margin in the range of 4.15% to 4.25% for FY23, which is slightly on the conservative side, according to Yes Securities.

Overall, brokerages are largely optimistic about IndusInd Bank’s prospects due to strengthening loan growth, sustained net interest margins, and the bank’s focus on aggressive expansion in districts with high deposit growth.


Note: Upside as compared to the current market price of ₹1,020 as on March 16, 2023.

SEE ALSO:

Analysts remain optimistic about India’s top 100 stocks: Most popular 5 stocks deliver double digit returns

RBI largely expected to hike repo rate by 25 bps in April even as US Fed expected to take a pause

Indian banks pass Jefferies’ Silicon Valley Bank test, brokerage finds them ‘well placed’