Bank stock that has risen 1,500% bets on a merger to extend gains

IndusInd Bank Ltd., India’s best performing lender in the past decade, is counting on its acquisition of a microfinance firm to help it improve profitability, while shrugging off risks from the country’s spreading shadow bank crisis.

IndusInd’s purchase of Bharat Financial Inclusion Ltd. will help it to “move the needle” on profitability parameters including return on assets and lending margins, Chief Executive Officer Romesh Sobti said. Acquiring the nation’s largest micro financier gives the bank presence in more than 115,000 Indian villages that will increase its cross-sell, lending and low-cost deposit mobilization efforts, Sobti said, in an interview in his office.

Mumbai-based IndusInd, which has risen 1,500 per cent since Sobti became CEO in 2008, lost some of its sheen after analysts including those at Credit Suisse AG and UBS Group AG flagged the lender’s exposure to beleaguered Indian shadow banks including Dewan Housing Finance Ltd. However, higher capital buffers and lower bad loans helped the bank sidestep the fate of rival Yes Bank Ltd., which had lent to the non-banks, and saw its market capitalization halve.

“IndusInd’s exposures are way lower than what is projected in those reports and is backed by adequate collateral,” Sobti said. “We are not expecting any spike in bad loans and are currently focusing on using the doorway offered to rural India through Bharat Financial.”

IndusInd has been more selective in lending to non-bank finance companies off late. The bank’s net bad loan ratio stands at about 1.2 per cent compared with 2.9 per cent at Yes Bank. IndusInd’s return on asset rose to 2.1 per cent in June from 1.9 per cent in the year ago period, filings show.

Still, there’s another risk looming for the bank, according to Morgan Stanley analysts -- Sobti’s retirement in March. The CEO who had quit ABN Amro Bank NV’s local unit to take the top job at IndusInd in February 2008, is credited with the turnaround that led to the surge in it’s shares, making it the best performer on the 10 member Bankex Index. The index climbed 200 per cent in the same period.

“There is no need for concern as the board has been applying its mind to this over last four years,” Sobti said. “By end of 2019 my successor will be in place, and there won’t be any disruption.”