IndusInd Bank has plunged over 10% within two days wiping out over ₹9,000 crore from the bank’s market capitalisation. The scrip witnessed heavy selling pressure amidst reports of the downgrade of stock from ‘neutral’ to ‘sell’ by foreign brokerage firm UBS. The stock was downgraded considering expectations of higher costs for credit.
Downgrade by UBS
The Union Bank of Switzerland (UBS) has lowered its target price for the stock to ₹1,400. The decision to downgrade the stock of IndusInd Bank comes by drawing inferences from the cost of credit of the bank. The brokerage further expects the lending costs to rise by 1.5% against the bank’s estimation of 65 bps in FY20.
IndusInd Bank lending’s to Non-Investment Grade (NIG) rated companies is relatively higher than it was earlier. Further, the retail deposits as a percentage of external liabilities for IndusInd Bank stood on average of 20%. This is the lowest amongst the rest of the private lenders.
The bank reported a 1.9% exposure to troublesome companies which it expects to lower in the upcoming quarters. The private lender also stated that their exposure in the stressed housing finance companies categorised in the above limit is not relevant.
The management of the company stated that the on-going crisis in the Non-Banking Financial Service (NBFC) and Housing Finance Companies is more of a ‘liquidity’ issue rather a ‘solvency’ matter.
Management indicated that while some small fringe players (IndusInd Bank does not have any exposure) may be impacted, larger players (barring the stressed HFCs) may see the limited impact. Due to large liquidity buffer maintained by these entities, the slowdown in disbursements and better asset quality (at least on the retail lending side).
The bank’s exposure towards stressed companies accounts for 1.9% of the total loans. However, to make the situation worse, the retirement of Mr Romesh Sobti, former Managing Director & CEO of IndusInd Bank could add to the woes. Brokerages and investors have a sceptical outlook for the company’s valuation multiples.
For FY19 the loan book of IndusInd stood at ₹ 1,86,494 crores. The bank provisioned ₹ 3,004 crores for their exposure in Infrastructure Leasing & Financial Services (IL&FS) categorised under Non-Performing Assets (NPA). The exposure involves ₹ 2,000 crores to the holding company and ₹1,004 crores to group companies and Special Purpose Vehicle’s (SPV). Almost 70% of the provisions were made against the holding company and 25% were made for operating companies and SPV,s.
On June 14, 2019, the stock of IndusInd Bank plummeted 4.17% to 1,426.80 from their previous closing price of ₹1,488.85.
The stock fell more than 5% and made a low of ₹1411.25 however it recovered to the current levels.
As per the BSE data, the market capitalisation of the scrip stood at ₹94,555 crore, as on 12th June. However, the market-cap for 14th June 2019 stands at ₹85,955.98 crores. The stock of the private sector lender has taken a steep dive of more than 10% in just two days. Wiping out over ₹9000 crore for the market capitalisation of the bank.