IndusInd Bank plays big role in investor confidence after mixed first quarter
IndusInd Bank’s performance in the June quarter was similar to that of most of its private sector peers. A sharp drop in moratorium levels and an increase in supplies characterized an otherwise subdued performance.
Almost half under moratorium a few months ago, only 16% of the loan portfolio is now subject to it. The private sector lender has chosen to be cautious, visible in the mere 2% growth of the loan portfolio. The pound fell 4% sequentially.
What stands out is the upbeat but cautious management commentary. New chief Sumant Kathpalia said the bank will slow down unsecured lending and small business loans will be scrutinized. IndusInd Bank could see its slip ratio increase by 92 basis points due to covid-19 and to mitigate this the lender has made a provision of ??1,203 crores. “We won’t be aggressive on asset growth this quarter,” Kathpalia said during a media interaction. At the same time, management pointed out that collections from borrowers have risen sharply in recent months and stood at 86% as of July 5. .
But improving performance is not enough to gain investor confidence, and the lender knows it. IndusInd Bank will lift ??3,288 crore through a preferred share issue and has already secured a bunch of qualified institutional buyers for it. U.S. hedge fund Route One Investment Co. has obtained regulatory approval to increase its stake in the bank to 10% from the current 4.9%, according to an Economic Times report last week. The hedge fund and three other investors would together invest about ??2,500 crore in the bank, the lender said in a swap filing Tuesday. The rest would be provided by the Hinduja Group promoters. They had already implored the regulator for the authorization to increase their stake in the bank to 26% against 13.3% currently.
The shares would be issued at ??524 exhibit, the bank said in its swap record. Despite Tuesday’s 4% rise, the stock is still trading 56% from February highs and has underperformed the sector index so far.
Management said the fundraising was not a hedge against Covid-19 risks but rather an attempt to boost investor confidence in the bank. For the pandemic however, the lender has sufficient provisions in accordance with its internal stress test.
Investors would be reassured by the fundraising plan, especially when the capital adequacy ratio has already reached a good level of 15.6%. But the key to confidence also lies in changing moratorium levels. What remains to be seen is the accuracy of IndusInd’s stress test when it comes to asset quality. It would also determine whether the capital it plans to raise is sufficient.
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