Analysts shrug off IndusInd Bank MD tenure worries

Analysts are not worried over Reserve Bank of India’s unexpected two-year extension of tenure for IndusInd Bank chief executive officer and managing director Sumant Kathpalia, and are instead confident over the bank’s prospects due to its strong business performance.

Kathpalia’s current term ends on March 23.

“Based on the interactions that we had with investors over the weekend, we believe many are concerned and have interpreted this move by the RBI as a negative development, and are possibly questioning whether the RBI is comfortable with the current MD & CEO of IndusInd Bank,” brokerage firm Macquarie Research said in a report on Monday. “In our view, IIB’s current MD & CEO stabilised the bank, focused on retail liabilities, recognised asset quality issues and worked on improving balance sheet granularity and eventually improved return ratios. We are not sure if the whistleblower complaint regarding the MFI (microfinance) book played a role in RBI’s decision.”

Also Read

Credit Suisse bankers leaving by the hundreds every week

Suryoday SFB’s FY24 provision in line with RBI proposed model

Banks’ non-food credit rises to over Rs 138 trn

IIT Madras Research Park, RBI’s innovation centre working on voice-banking technologies

Also read: Explained: How digitisation is uncomplicating logistics for MSME exporters

Shares of IndusInd Bank fell nearly 8% intraday on Monday in the aftermath of the SVB collapse, which made bank stocks bleed. The stock closed 7.3% lower at Rs 1,060.85 on the National Stock Exchange. It ended 7.5% lower at Rs 1,060 on the BSE.

Since September, the bank’s stock has fallen around 9% due to lack of clarity over the extension of Kathpalia’s tenure, in addition to concerns in the broader market over inflation.

Even as the central bank’s latest announcement took Dalal Street by surprise, analysts contend that the bank’s strong deposit franchise, improving asset quality and attractive valuations make IndusInd Bank a good long-term investment bet. “IndusInd Bank has been demonstrating a healthy improvement in operating performance, fuelled by a pick-up in loan growth, strengthening liability franchise and improving asset quality,” brokerage firm Motilal Oswal Financial Services said a report. “Asset quality risks are receding with a gradual reduction in slippages, which will drive a continued moderation in credit costs.”

Also read: India emerges as top importer of arms: SIPRI

Motilal Oswal expects the bank’s earnings to grow at a CAGR of 28% over the next two years. The bank’s return on assets is expected to rise to 2.2% in 2024-25 (April-March) from 1.8% currently. Return on equity is expected to rise to 18% in 2024-25 from 14.8% currently.

“IndusInd Bank has a dominant position in segments like commercial vehicles, microfinance institutions and diamond trade finance that form one third of overall loans. Going forward, it will ramp up segments like housing/ used-car/ merchant financing (in MFI markets), gold loans and business banking. Approach to corporate lending has been risk-averse, cashflow based for past few years,” Jefferies said in a report. “This (the two-year extension) may be a reflection on need to improve on controls (MFI incidence), liabilities (retail mix), underwriting (retail and less risky). We see this as reasonable time to demonstrate progress as the bank had already made moves on these counts.”

Given the bank’s strong fundamentals, investors should utilise any correction in the stock as a buying opportunity, say analysts.