Shares of IndusInd Bank hit 15 percent lower circuit at Rs 349.85 in the early trade on BSE on March 31, a day after the private lender said its deposits were down by around 11 percent.
Of the total fall in deposits since Q3FY20, 70 percent was through state government deposits and 30 percent was via corporate deposits.
"Deposits fell 10-11 percent and almost two-third of reduction is on account of government-related accounts – this is largely related to general private sector bank stance. This will also result in lower CASA ratio, but reduce our dependency on this category for deposits in future," IndusInd Bank said in a regulatory filing on BSE on March 30.
Some reduction in wholesale, possibly attributable to stock price fall is also a reason behind the fall in deposits. The retail reduction is least, the bank said and claimed that deposits are more stable and flows recommenced while NIMs are also expected to remain stable.
"Deposit traction will rebuild in April. The bank has an aggressive deposit retailisation strategy in place. LCR-based retail deposit base growing more than 40 percent, significantly ahead of peers. We have enhanced a deposit category by 25 bps to accelerate this," IndusInd Bank said.
The stock price has corrected steeply in recent days, owing to concerns about asset quality and strength of funding franchise.
The coronavirus outbreak has further impacted growth and asset-quality prospects in the select business segments.
Tough road ahead
The bank said it has replaced the bulk of these deposits by CDs and borrowings. This, as per brokerage firm Emkay Global, should inch up funding cost in the near-term, weighing in on margins.
Besides, the brokerage said the bank plans to focus on retail deposits (via expanding branches), which will take time to build and thus credit growth will be calibrated, tracking deposit momentum and not vice versa, as it happened in the past.
"The bank has seen deterioration in asset quality due to corporate slippage, which we believe will accelerate after the recent lockdown, led by stress in retail and SME and some lumpy corporate stress (for e.g., Vodafone). Thus, we build in higher NPAs at 3.1 percent/LLP (loan loss provision) at 170 bps in FY21E," Emkay Global said.
The bank plans to rebalance its book towards consumer banking, which should lead to margin or RoA expansion in the long run, Emkay said.
The bank has said cards, personal loans, real estate and loan against property (LAP) are showing early signs of disruption, while diamond and CV portfolios are well-tested across cycles with higher customer vintage and should bounce back as normalcy returns.
Moreover, the bank believes that the RBI moratorium of three months should help manage this temporary disruption unless the situation worsens.
Emkay Global said that near-term growth and asset quality pain will weigh on stock performance, but the new MD’s strategy to focus on retailisation of assets and liabilities should help the bank in the long run.
The brokerage has a “buy” recommendation on the stock, with a revised target price of Rs 630, valuing the bank at 1.1 times FY21E ABV/1 time FY22E ABV. Emkay said the key risks to its call are higher-than-expected NPA formation and a further deceleration in loan growth.
Brokerage firm Motilal Oswal Financial Services, too, has a “buy” on the stock, with a target price of Rs 800.
"We estimate credit cost to remain elevated over the next few quarters while lower our business growth assumptions. We thus cut our FY20 and FY21 earnings by 13 percent and 22 percent, respectively, and estimate the bank to deliver FY21E RoA and RoE of 1.7 percent and 14.3 percent, respectively. We reduce our target price to Rs 800 which corresponds to 1.3 times forward ABV," Motilal Oswal said.
IIFL Securities, too, has a “buy” call on the stock, with a target price of Rs 650.
IIFL said that while the fall in deposits has been replaced by other sources, it exposes the bank’s tight liquidity situation.
IIFL believes this will force IndusInd Bank to cut back growth and impact NIMs. IndusInd is in the process of accelerating stressed-asset recognition and provisions too.
"Given this and the Covid-19 related impact, we downgrade profits by 6.5/26/14 percent for FY20/21/22ii, respectively. We believe IndusInd Bank would trade at 1 time FY22ii BVPS due to uncertain growth and profitability outlook for now," IIFL Securities said.
ICICI Securities has a “buy” recommendation on IndusInd Bank but with a target price of Rs 1,268 against Rs 1,796 earlier.
"Despite some concerns on stressed telecom account, higher vehicle book and uncertainty around COVID-19, we believe IndusInd Bank is a good value proposition given it is trading at 0.9 timrs P/ABV FY21E," ICICI Securities said.
ICICI said the impact on asset quality may be for a short term. However, it will be important to track borrowers' behaviour after the completion of moratorium period, it said. As per the brokerage, working capital loans and unsecured loans like personal loans and credit cards are at higher risk of default.
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