IndusInd Bank Q1 Preview: Analysts Eye Clean Slate After Derivative Mess, Succession Overhang

Analysts will be closely watching out for IndusInd Bank’s June quarter earnings as the private sector lender gears up to report its first quarterly performance on Monday. These results come after the derivative accounting episode that rattled investor confidence and led to questions around governance and succession planning. To be sure, this is the second quarterly result announcement since the issues cropped up.

With leadership stability in focus and concerns over stress from the microfinance segment still lingering, the street will be watching closely for signs of operational normalcy and financial recovery.

In the March quarter earnings call, Chairman Sunil Mehta had said that the board will submit names of three potential candidates to the RBI by June 30. Sources suggest that the announcement of the new CEO maybe coming soon.

A committee of two senior executives who are managing the bank in the absence of a full-time CEO, has been granted time till August 28. The original deadline for the committee was set for July 28.

The private sector bank, which will announce its June-quarter earnings on Monday, is likely to report a consolidated net profit of Rs 653 crore as compared with net profit of Rs 2,171 crore a year ago, according to a poll by Bloomberg.

In the March quarter, the posted a net loss of Rs 2,329 crore.

Brokerages expect headline numbers to be likely mixed, with some respite from the absence of one-off losses seen in the March quarter, but underlying pressures on growth and asset quality would still weigh on its performance.

• Net profit seen down 70% to Rs 653 crore

• NII seen falling by 14% to Rs 4,667 crore

• NIM seen at 3.57%, higher than 2.25% QoQ

• Provisions seen at Rs 1,424 crore, up 36%

The bank's net interest income is seen down by 14% on year to Rs 4,667 crore. In Jan-Mar, it was at Rs 3,048 crore.

However, net interest margin is seen expanding to 3.57% from 2.25% in the March quarter as the bank turns back to normalcy.

Analysts expect muted loan growth or even a sequential degrowth, largely due to the bank’s conservative stance post accounting crisis and a drop in corporate lending to preserve liquidity.

"We expect fewer negative surprises this quarter. Operating profits to decline 40% YoY led by weak loan growth, NIM pressure and weak fee income growth," Kotak Institutional Equities said in a pre-earnings note. "NIM reported likely to improve 90 bps QoQ at 3.1% as the prior quarter had several one-off related charges which is unlikely to be repeated."

Kotak Institutional Equities has estimated loan growth at just 0.5% sequentially, while others like Nuvama Institutional Equities, Dolat Capital Research, and Systematix Institutional Equities expect a 3-5% QoQ decline.

While some brokerages like Yes Securities and Prabhudas Liladher expect provisions to decline sequentially due to already front-loading of provisions towards MFI book in the March quarter, others remain cautious.

Kotak is building in elevated slippages of 2% which would be around Rs 1,700 crore, while Nomura Research and Emkay Global Financial Servicces flag that credit costs will remain high, even if slightly moderated.

Overall, asset quality of the bank remains a key risk. Most analysts believe that gross NPAs could worsen, especially from the MFI portfolio.

Prabhudas Liladher expects a 21 basis points deterioration in the bank's gross NPA on a sequential basis, while Motilal Oswal Securities and Nomura has warned that stress could persist across segments.

In the aftermath of the derivative misreporting and mounting concerns over top-level succession, management commentary around corporate governance, deposit mobilisation, and MFI risk containment will be crucial.

After reporting one of its weakest quarters in recent years in Jan-Mar, investors will be hoping that Q1 marks a turning point or at least a return to transparency and control. But with structural concerns still unresolved, IndusInd Bank's results may offer more questions than answers.