How IndusInd Bank Was Caught In A Perfect Storm

IndusInd Bank Ltd.’s shares have crashed 72 percent, the most among peers, since March 5 after the banking regulator seized control of struggling Yes Bank Ltd., triggering speculation about the financial health of its smaller private peers.To be sure, many banks’ stocks have tumbled amid the coronavirus-driven global selloff, the biggest since the 2008 financial crisis. And Yes Bank’s rescue added to fears around smaller Indian private lenders. For IndusInd in particular, that amplified fears amid speculation stemming from its exposure to stressed corporate groups, the bruised telecom sector and deposit outflows..A potential hit from the outcome of the adjusted gross revenue dues case was already factored in the stock price as the bank’s exposure to Vodafone Idea Ltd. is roughly 10 percent of the net worth, Ravikant Bhat, banking analyst at Indianivesh Securities said. In the last one month, exposure to other stressed groups, Yes Bank fiasco and overall market turmoil because of the coronavirus pandemic led to the free fall, he said.Here’s a look at each of the reasons that have made investors jittery about IndusInd:Deposit ConcernsThe withdrawal caps on Punjab and Maharashtra Cooperative Bank and then on Yes Bank triggered concerns about deposits of mid-sized banks. A couple of state governments issued an advisory to their departments to shift their funds to the public sector banks.“Recent events and delayed bailout of a private bank creates an unnerving precedent and uncertainty for deposit holders/debt providers to private banks,” Ashish Gupta, managing director and head of equity research, India, at Credit Suisse said in an interview to Bloomberg.The Reserve Bank of India, however, has advised state governments not to shift their deposits from private to public sector banks.IndusInd, RBL Bank Ltd. and Bandhan Bank Ltd., in their filings, tried to allay concerns highlighting the deposits withdrawn by states comprised 2 percent, 3 percent and 1 percent, respectively, of their total deposit base.Exposure To Stressed CompaniesIndusInd Bank, in its third-quarter earnings, disclosed a total exposure to the telecom sector worth nearly Rs 8,000 crore. That’s when the Supreme Court order asking operators to pay dues calculated based on adjusted gross revenue, or non-core revenue, threatened the survival of at least Vodafone Idea Ltd.According to Macquarie’s February note, Indusind Bank’s exposure to Vodafone Idea alone is Rs 3,400 crore—about a quarter of its advances to the sector.But Vodafone Idea is not the only account that has triggered concerns.IndusInd had disclosed an exposure of Rs 3,000 crore to the IL&FS group after a series of defaults from the infrastructure builder and financier in September 2018 threatened a contagion in the credit markets, leading to its takeover by the government.Since the IL&FS fiasco, banks including IndusInd disclosed exposure to other stressed groups including Anil Ambani companies, Dewan Housing Finance Corporation Ltd., Essel Group, Cox and Kings Ltd. and Sintex Industries Ltd.This caused fear that bad loans would mount, adding to investor anxiety..IndusInd Bank, however, said in its filing that exposure to stressed media, diversified, and housing finance groups reduced to 0.47 percent as of December compared with 1.9 percent in September 2018.In a press statement last week, the bank said it had no gross bad loans to real estate and gems and jewellery sectors as of February and its commercial vehicle and microfinance portfolios remain steady. Property developers, gems and jewellery and automobile sectors have been going through a prolonged slowdown, triggering debt repayment concerns.Real estate and gems and jewellery account for 3.8 percent and 3.73 percent of the corporate loan book as of December, the bank said.Commercial vehicles, overall vehicle loans and microfinance loans contribute 12 percent, 28 percent and 10 percent, respectively, of its consumer loans. The ongoing lockdown against the Covid-19 outbreak has triggered concerns about this segment of loans.Sanjay Mallik, head of investor relations and strategy at Indusind Bank, said in an emailed response to BloombergQuint that the bank expects net non-performing assets to fall in the ongoing quarter to below 1 percent. “That should provide an idea of the overall direction.”Mircolending ExposureAmid the coronavirus outbreak, shares of microfinance-focused companies and banks have fallen sharply as social distancing and lockdowns bring business to a halt. Indusind Bank recently acquired Bharat Financial Inclusion Ltd. as it looks to leverage the MFI’s rural network for cross-selling opportunities.Besides exposure to microlending and stressed accounts, according to Jaikishan Parmar, banking analyst at Angel Broking, contingent liabilities were also a reason that sparked concerns for IndusInd.Contingent LiabilitiesContingent liabilities are off-balance-sheet exposures such as guarantees, letters of credit, liability on account of forex contracts. Among its large banking peers, IndusInd has the highest such exposure..To quell concerns about the off-balance-sheet exposure, IndusInd said in a presentation that 90 percent of it was market-related notional principal contracts. These are a kind of interest rate swaps—or derivative contracts that trade interest payments as a hedge against adverse movements—based on a notional principal amount..Two bankers, who spoke on the condition of anonymity, explained that in such derivative contracts, the quantum of off-balance sheet exposures can be very high with very little risk. Forex contracts and derivatives become a risk only when the other party is not able to honour the commitment, they said.Notional principal contracts involve a credit conversion factor or calculation of risk-weighted assets to set aside capital buffers against such contingent liabilities to comply with the RBI norms, the bankers said. Guarantees, the bankers said, can be a bigger issue if a client goes bust, the bankers said.But for IndusInd, guarantees form a small part of the off-balance-sheet exposure. And Mallik, on his part, reassured that derivative exposure is covered back-to-back and accounts for only 3 percent of IndusInd’s risk-weighted assets..About 70 percent of the analysts tracking IndusInd have a ‘Buy’ rating on the stock and only 4 percent recommend ‘Sell’. The average of 12-month targets compiled by Bloomberg suggest an upside potential of 330 percent for the stock.And the bank is the cheapest among private peers, trading at 0.6 times its estimated book value for FY21..Virus Spread, Yes Bank Crisis Raise Risks For Private Banks

How IndusInd Bank Was Caught In A Perfect Storm

The panic selloff triggered by Covid-19 outbreak was just the latest in the series of investor fears regarding IndusInd Bank.

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