Pedestrians walk past an IndusInd Bank Ltd. branch in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

IL&FS Exposure Has IndusInd Bank Investors Worried

IndusInd Bank Ltd.’s exposure to troubled shadow lender IL&FS Ltd. has investors worried.

The stock of the private sector lender has dropped to its lowest level since May 2017 after it missed second quarter profit estimates as it made a Rs 275-crore contingent provision against its exposure to the IL&FS group.

IL&FS Exposure Has IndusInd Bank Investors Worried

IndusInd Bank had given a bridge loan to the beleaguered infrastructure financier which was to be repaid after a rights issue, the lender said in an analyst call. The rights issue was postponed after a slew of defaults led to rating agencies downgrading IL&FS group companies to junk status.

The rights issue, earlier slated from Oct. 5-19, is postponed till next year, financial portal moneycontrol.com reported, citing unnamed people.

Meanwhile, the bank said the provision was made on their judgement of a haircut and with the auditor’s consent and added that there isn’t any requirement of a further provisioning now.

“The exposures are standard, and payments are being met. We expect these to remain standard,” IndusInd Bank said during the conference call. “As soon as the rights issue or liquidity infusion happens, they will be repaid.”

But brokerages are not convinced.

After the management call, IDFC Securities said the total exposure of the bank towards IL&FS could be as much as Rs 2,400 crore.

IndusInd Bank in its quarterly analyst call clarified that the exposure is broadly to two entities—Chenani-Nashri Tunnel project and IL&FS. The bank, however, said there will be no haircut on the road project due to its AAA rating.

Yet, IDFC Securities’ analyst Mahrukh Adajania said lenders may have to take haircuts even in the Chenani-Nashri Tunnel project as it isn’t easy to sell assets in India.

“As for the exposure to IL&FS, we believe there could be higher haircuts because there are too many claimants to the funds that will become available through the next liquidity infusion,” Adajania said. “We expect IL&FS standalone to become non-performing latest by the fourth quarter, which means that the bank may have to stop accruing interest on the loan in case a resolution is not worked out by then and may also need to make more provisions.”

Nomura said the management’s reluctance to share IL&FS exposure is likely to create some uncertainty.

Macquarie’s analyst Suresh Ganapathy agreed. He said lack of proper communication on the management’s transition plan and an increase of the bank’s exposure to gems and jewellery and commercial real estate sectors during the second quarter are worrying investors. Also, IL&FS Securities Services Ltd., a company being acquired by IndusInd Bank, was placed under watch by rating agency ICRA on Oct. 19, Ganapathy said.

UBS’ analyst Vishal Goyal said though the bank may continue to report strong growth in the near term, the bad loan risk from its exposure to mid-sized companies is increasing.

Of the 53 analysts tracking the stock, 43 have a ‘Buy’ rating. Also, the Bloomberg consensus target shows a potential upside of 39 percent over Monday’s close.

Shares of IndusInd Bank snapped a five day losing streak and rose 1.8 percent to Rs 1,468 apiece as of 12:00 p.m. The stock is down 10.9 percent so far this year, compared with 2.2 percent decline in the NSE Nifty Bank Index.

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