- This is another case of a marquee private bank in India falling from grace amidst rising bad loans.
- IndusInd Bank slumped over 7% after UBS downgraded stock to ‘Sell’
- The global investment bank said the credit risks are higher than expectations.
The shares of IndusInd Bank slipped by over 7% at one point on Thursday after global investment bank UBS downgraded its stock to ‘sell’ and said that the credit risks may be more than twice as high compared to the company’s guidance.
“The downside risk to IndusInd Bank’s earnings exists as believe credit costs could be higher at 150 basis points as compared to the company’s guidance of 65 basis points in 2019-20,” UBS said in its report on June 12.
Business Insider reported on May 31 that IndusInd Bank had made the same mistake as many other Indian banks trying to downplay the worst of its problems.
What’s worse, according to UBS, there could be surprises. “Retail deposits, as a percentage of external liabilities for IndusInd is the lowest among banks in our coverage, at around 20%, which is a structural issue, in our view, and often manifests in credit quality surprises,” UBS said.
Simply put, when compared to its peers, the bank has far fewer individual deposits to make up for any more loans that may turn sour in the days to come.
The stock which is trading at a price close to its 52-week lows after the recent quarterly earnings showed that the bank’s net profit fell 62% to ₹3.6 billion. Moreover, the bank made a provision of ₹12.7 billion against its loan to the troubled infrastructure lender IL&FS.
A provision is the amount of money a bank sets aside to cover a loan which is unrecoverable. Not only did this amount come in too late, but it also is not enough to cover its exposure to IL&FS which turned insolvent last year.
The bank had been changing goal posts of its extent of exposure almost every quarter since the crisis unfolded. “They should have told us (analysts) from day one about the provision, and not have guided lower numbers to us,” says Hemindra Hazari, an independent capital markets. He wrote a report on the bank titled ‘ Sell-Side Analysts’ Blind Faith in IndusInd Bank Need Not Blind Investors’.
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An Indian bank is still making the same mistake of hiding the worst and hoping for the best