Best Indian Bank Stock for Decade Stalls as Succession Looms
(Bloomberg) -- After more than a decade of share price outperformance, the skies have darkened for IndusInd Bank Ltd., as the Indian lender faces challenges from worsening asset quality to a transition to new leadership.
IndusInd has a hefty exposure to India’s troubled telecommunications sector as well as to real estate where several developers are struggling amid the country’s prolonged shadow banking crisis. Further uncertainty stems from a coming leadership change, with Chief Executive Officer Romesh Sobti, 69, due to stand down at the end of March after a dozen years at the helm.
“IndusInd was commanding a premium in its share price because of its strong growth without any equity dilution,” said Siddharth Purohit, an analyst at SMC Global Securities Ltd. Now, its proportion of exposure to telecom and real estate is sparking worries about a moderation in future lending growth and the possibility of a capital raising, Purohit added.
IndusInd was the best performing stock on the Bankex index from early 2008, when Sobti took over, until September 2018, when India’s shadow bank crisis erupted with defaults at a major infrastructure lender. Since then, it’s the third worst performer after RBL Bank Ltd. and Yes Bank Ltd., the private-sector lender which has been struggling to raise new capital.
While 72% of analysts tracking IndusInd still recommend the shares, the ratio of ‘buy’ calls has dropped to the lowest in a decade, according to data compiled by Bloomberg.
Bad loans rose to 2.18% of the total in the quarter ended December, close to the highest proportion in a decade, and there are worries they could rise further.
“IndusInd Bank’s non-performing loan risks have risen in the past six months,” UBS Group AG analysts led by Vishal Goyal wrote in a recent note. They said about 30% of IndusInd’s loan book is facing headwinds and also 4% of total exposure could turn sour in the next 15 months.
A key concern is IndusInd’s 34 billion rupee ($473 million) exposure to Vodafone Idea Ltd., which was hit hard by a court ruling last year that it and other telecom firms must pay a total of $13 billion to the government. Worries about its high exposure to the telecom and real estate sectors prompted Moody’s Investors Service to downgrade IndusInd’s outlook earlier this month to ‘negative’ from ‘stable.’
Analysts have voiced fears about rising bad loans from the real estate industry, which has suffered during the shadow banking crisis. With around 8% of its total loan book extended to the sector, according to Moody’s, IndusInd has one of the highest exposures among private sector banks -- ICICI Bank Ltd. in contrast has an exposure of less than 4%, filings showed.
Shares of IndusInd fell as much as 1.5% on Wednesday morning in Mumbai. The stock has dropped about 25% this year.
An IndusInd spokesman said all real estate and telecom loans are “standard,” meaning they haven’t soured, and the bank is well capitalized. Its gross bad loans are “amongst the lowest in the banking industry despite a challenging macro-economic backdrop,” the spokesman added in an emailed statement.
Also of concern is how IndusInd will manage these bad loan challenges after Sobti’s departure. According to an exchange filing, the bank has proposed an as-yet unnamed executive to replace him. But the Reserve Bank of India has yet to announce its approval for the chosen candidate.
Another leadership transition is due to take place later this year at IndusInd’s larger rival HDFC Bank Ltd., where Managing Director Aditya Puri, 69, is nearing the retirement age of 70 mandated by the RBI.
The IndusInd spokesman said the bank expects approval from the regulator soon “and well before the end of Mr. Sobti’s tenure.”
Indeed, analysts at HSBC Holdings Plc have maintained their ‘buy’ rating on IndusInd, calling worries about asset quality overblown and seeing “a low possibility of an adverse action from the RBI on the board’s proposal on CEO term/succession,” according to a Feb. 21 note.
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