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Saturday, January 11, 2014

Slowing retail growth may impact earnings

IndusInd Bank kicked off the results season for banks on a slightly muted note. While the bank managed to deliver strong earnings growth, pressure on asset quality and slowing growth in retail loans played spoilsport. The stock lost 3 per cent on Friday.

Loans have grown at a steady pace over the last three years, and this quarter too, 24 per cent growth in lending supported the core performance of the bank. However, the weak link in the lending profile was the slowdown in high-yielding retail loans that have been the main driver of loan growth in the past. From loan growth of 30 per cent in the March quarter, growth in the retail segment has tapered off to 14 per cent in the December quarter.

Corporate loans

This may lead to pressure on margins as the low-yielding corporate segment now accounts for 53 per cent of the loan book. The yields on corporate loans are 4 percentage points less than those in the retail segment. After consciously building the loan-mix in favour of the retail segment in the last three years, slowing credit offtake in the retail segment is a worry.

CV segment

Within the retail segment, nearly half comes from commercial vehicle financing. IndusInd Bank acquired the vehicle finance business of Ashok Leyland in 2004. This segment grew 35 per cent annually over the last three years. However, due to the slowdown in the CV segment, lending growth in this segment has been muted at 2 per cent in the December quarter. Diversification to LCVs and the used commercial vehicles segment has helped offset the sluggishness in the medium and heavy commercial vehicles space.

Asset quality did see some pressure both in the corporate and retail portfolio, but as a percentage of total loans it was only a marginal 7 basis points increase over the previous quarter. In the retail segment, the pressure has been mainly from the commercial vehicles and construction equipment portfolio, which will recede once the segment starts to recover.

While the bank’s provision coverage ratio came down to 74 per cent in the December quarter (from 80 per cent in the last two quarters), it is still above the steady 70 per cent that it has maintained in the past few years.

Slowing growth in the retail segment, pressure on margins and incremental stress on asset quality may need some watching in the coming quarters. The company’s earnings have grown at 45 per cent over the past three years, and the sixth-largest private sector bank has always traded at a premium to ICICI and Axis Bank, on account of higher growth seen in the past. The stock is now trading at 2.4 its one-year forward book value, which is close to its historical average.

Source: Thehindubusinessline


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