Indusind Bank: Bad loans, slow deposit growth spoil December results

The stock of IndusInd Bank fell 4% after the results for the quarter to December despite a healthy 30% y-o-y growth in net profits. This is mainly due to heightened investor focus on asset quality over the last few months. A spike in non-performing assets, or NPAs, and slower deposit growth was a dampener to what was otherwise a decent result of the company this quarter.

Its net interest income, or NII, grew by 26% y-o-y in the December 2013 quarter. While this is healthy, a major concern is the rising credit-to-deposit ratio. In December 2013 quarter, loan or credit growth grew by 24%, while deposits grew by a meagre 10%. As a result, its credit-to-deposit ratio rose to 93% -- the highest in recent quarters. This means the bank will have to increase its deposits in the next quarter to maintain its net interest margins, or NIMs, at this level. In the December quarter, its NIMs remained flat q-o-q at 3.65%.

As for the bank's lending profile, the bank's exposure to corporate banking rose to 53% from 51% in the previous quarter, with the rest of the lending to the consumer finance segment.

IndusInd Bank primarily focuses on vehicle financing in the consumer finance segment. Given the slowdown in automobile growth, the lower loan growth in this segment was on expected lines. However, lower yields on the corporate lending segment may impact growth in interest income in the next few quarters. In the December 2013 quarter, the yield on corporate banking loans was 11.89%, while for consumer loans, it was 15.63%.

Another concern this quarter has been the rise in non-performing assets, or NPAs. On an absolute basis, its net NPAs increased 50% q-o-q to Rs 165 crore. However, this is still not a cause of worry since its net NPAs as a percentage of total assets stand at 0.31%, which is still healthy compared to its peers.

At the current market price, the stock is trading at a price-to-book value (P/BV) of 2.5, while its peers such as HDFC Bank and Kotak Mahindra Bank are trading at a P/BV of 4.3 and 3, respectively. The bank's stock appears to be fairly valued at this level, given its lower size and return on equity.