IndusInd Gets A Margin Boost

ON MARCH 31, 2020, when Sumant Kathpalia took charge as MD and CEO of IndusInd Bank, the Union government announced a 21-day lockdown to combat the pandemic. The lockdown and its subsequent extension wreaked havoc on the economy. IndusInd Bank was no exception. Its shares tanked 30% to an eight-year low of ₹235.55 on NSE the day Kathpalia took over. Deposits fell 6.6% to ₹2.02 lakh crore on March 31, 2020, from ₹2.16 lakh crore in December 2019 quarter. In Kathpalia’s first analyst call as CEO on March 30, 2020, the bank indicated Covid could increase credit costs to 200-210 basis points in March 2020 quarter, way above its historic average of 37 basis points. This signaled compression in net interest margins and rise in bad loans.

Cut to 2024. IndusInd Bank’s gross non-performing assets are down from 2.45% of loan book in FY20 to a decade low of 1.92%. Deposits rose 14% year-on-year to ₹3.84 lakh crore on March 31, 2024, while profit after tax grew 21% to ₹8,950 crore during the last fiscal.

“The bank got severely impacted by Covid and given that it has a sizable mix of MFI and commercial vehicle (CVs) loans, took time to get back in shape. Sumant has put a strong focus on improving deposit franchise, restoring asset quality and driving business growth,” says Nitin Aggarwal, head, BFSI Research, Institutional Equities, Motilal Oswal Financial Services.

Kathpalia says the bank has shown traction on all key metrics in FY24 and expects similar trends in FY25. “We are growing the corporate book in a calibrated manner with focus on granularity and areas where we have the right to win rather than chasing headline growth numbers,” he said in the analyst call after FY24 results. IndusInd Bank’s return on assets rose to 1.9% in FY24 from 1.54% in FY20. The bank achieved this while maintaining net interest margins around 4.25%, among the highest in the private bank category. This puts it on a par with historically top-performing private sector players such as HDFC Bank and Kotak Mahindra Bank.

IndusInd continues to close the gap with larger peers. Its branch network has grown to 2,984 from less than 2,000 at the end of March 2020. “We believe our investment in distribution will help us maintain momentum in retail deposits,” he says.

G. Chokkalingam, founder of Equinomics Research and Advisory, says IndusInd has performed well in growth and quality of assets. “The acquisition of microfinance giant Bharat Financial and merger (in 2019) gave it a presence in smaller towns and rural markets,” he adds. However, as IndusInd Bank has a fixed-rate portfolio such as CV loans, personal loans and credit cards, when interest on commercial paper rose sharply in H2 of 2022 and early 2023, it was not able to pass on higher interest rates to customers. “Despite this, the bank was able to maintain its NIM, which was commendable. Going forward, as and when the interest rate cycle turns, IndusInd will be in an advantageous position. This is because its funding cost will decline, but since interest on lending portfolio is fixed, it will continue to earn higher margins,” says Aggarwal of Motilal Oswal. “The bank is on track to report healthy earnings growth over next two years as well in FY25 and FY26,” he adds.

Kathpalia says key focus areas for FY25 are attracting retail deposits, calibrating loan growth in sync with deposit growth, diversification and profitability.