IndusInd Bank Ltd. pamphlets are arranged for a photograph in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Q3 Results: IndusInd Bank Meets Estimates Despite Higher Provisions 

IndusInd Bank Ltd. met its third-quarter profit estimates despite making provisions for its exposure to IL&FS Group.

Net profit rose 5.23 percent year-on-year to Rs 985 crore in the October-December period, according to the lender’s exchange filing. That’s higher than the Rs 810 crore consensus estimate of analysts tracked by Bloomberg.

Net interest income, or core income, of the bank, rose 21 percent on a yearly basis to Rs 2,288 crore—lower than the Rs 2,360 crore estimated. Net interest margin remained unchanged from last quarter at 3.83 percent.

Provisions grew 157 percent to Rs 607 crore, eating into the profit and offsetting the higher revenue.

Dealing With The IL&FS Account

The bank maintained the IL&FS group account as “standard”, Managing Director Ramesh Sobti said. The bank had earlier disclosed that they have an exposure of Rs 3,000 crore towards IL&FS. Of this, Rs 2000 crore was in the form of a loan given to the holding company IL&FS shortly before the group went into default. This loan was backed up funding which was likely to come in via a rights issue. The prospects of such shareholder funding diminished after the government superseded the board of IL&FS.

The accounts currently fall in the “special mention account” category and will likely be classified as NPAs in the next quarter, Sobti said.

There are overdues. Prior to October, there were monies held by banks for servicing the debt. They were in the form of escrows or debt service reserve accounts or fixed deposits etc. And they were used to service these debts. So certainly, these accounts are SMA status but they were standard in quarter three. They may not be standard in quarter four.
Romesh Sobti, MD & CEO, IndusInd Bank

The bank has made a contingent provision of Rs 255 crore against these accounts. It had kept aside Rs 275 crore in the last quarter. Also, a floating provision—part of profits kept for contingencies—of Rs 70 crore was made in the previous quarter.

It has now set aside a total of Rs 600 crore against the IL&FS account, so far.

“The bank’s unresolved exposures to IL&FS could result in higher credit costs in the interim, as management is likely to take a conservative stance on provisioning,” Bloomberg Intelligence had earlier said in a report.

“We are not hesitant to say we will make more contingency provisions if our assessment of the realisable value of assets in the company deserves more provisioning,” Sobti said. He added that the full impact of IL&FS would be accounted for this quarter and credit costs will normalise starting next financial year.

This quarter we will make further provisions linked to our final assessment of the realisable value...based on that we will take higher provisioning as needed. We will take it to a level that we are comfortable with and we don’t have to provide any more.
Romesh Sobti, MD & CEO, IndusInd Bank

Asset Quality Deteriorates Mildly

IndusInd Bank’s asset quality worsened during the three months ended December. Gross bad loan ratio expanded to 1.13 percent from 1.09 percent in the previous quarter. Net bad loan ratio, too, expanded to 0.59 percent from 0.48 percent.

Net slippages stood at 0.46 percent of the entire loan book

The bank has one of the best asset qualities among peers and is expected to maintain that, the Bloomberg Intelligence report had said, adding the lender’s bad assets as a proportion of total loans may edge slightly higher over the next two years before falling back, still outperforming most Indian lenders. “Its NPL ratio yet is likely to rise as IndusInd Bank’s loan book matures and as economic activity regains a footing. This suggests credit costs will increase before they level off.”

Growth & Succession

The bank reported a 27 percent growth in operating profits during the quarter. Advances rose 35 percent while deposits grew 20 percent.

According to Sobti, demand for loans has remained strong across most segments including small and medium businesses and vehicle finance. With non bank lenders slowing growth in some of these segments, Sobti sees an opportunity to gain market share.

We are seeing an across sectors pull. It is not linked to any one segment. There is certainly seeing a strong and secular credit growth trend across our portfolio.
Romesh Sobti, MD & CEO, IndusInd Bank

The bank will now focus on completing the merger with Bharat Financial, which is expected to conclude before the end of the financial year. This will make rural banking a core focus area for IndusInd Bank to supplement the semi-urban and urban banking operations.

Sobti also said the bank has been in the process of succession planning for nearly four years. “We have been grooming home grown talent. As and when the transition happens, we will be ready for a smooth process.”

Also read: Q3 Results: IndusInd Bank’s Lending To IL&FS Likely To Become NPAs In Next Quarter

Watch the interview with Ramesh Sobti, MD and CEO of IndusInd Bank here

Shares of the private lender fluctuated between gains and losses after the earnings were announced and closed 1.47 percent higher.

The bank’s stock has fallen more than 8 percent over the last one year compared with a 6.95 percent rise in the NSE Nifty Bank Index. The S&P BSE Sensex rose 4.76 percent in the same period.

Q3 Results: IndusInd Bank Meets Estimates Despite Higher Provisions