Uncertainty surrounding the extension of the term of IndusInd Bank Ltd’s managing director and chief executive officer Sumant Kathpalia has been put to rest.
On Friday, the Reserve Bank of India (RBI) approved Kathpalia’s tenure extension only for a period of two years versus investor expectations of three years. Recall that in September, IndusInd’s board had approved an extension of three years.
“The RBI typically grants a one- or three-year renewal, so two years is unprecedented,” Nuvama Researchs said in a report. IndusInd’s shares fell by as much as 7% on Monday.
Commenting on the development, Shivaji Thapliyal, head of research and lead analyst at Yes Securities Ltd, said, “We interpret this as RBI desiring to examine IndusInd Bank’s performance again in a relatively shorter timeframe of two years before any potential decision of further reappointment can be considered.”
The lack of clarity on Kathpalia’s tenure extension had been a key overhang for the IndusInd stock, which has fallen by 13% so far in 2023 amid the muted sentiment in the equity markets.
So, with this issue out of the way now, the Street’s focus is likely to shift back to its earnings performance.
The good news here is that in the December quarter, the bank’s asset quality had been stable with a sequential dip in slippages.
Loans grew by 19% year-on-year, and deposits rose by 14%. Although microfinance lending is seeing a slow recovery, decent traction in its vehicle financing segment is expected to keep the overall loan book in good stead.
But with rising interest rates, the fight for mobilization of deposits is likely to get intense among banks. Garnering deposits is a key concern for IndusInd Bank in the coming quarters, cautioned Gaurav Jani, research analyst at Prabhudas Lilladher. This is because the bank has a higher share of wholesale deposits, compared to its larger peers, that are not usually as sticky as retail deposits, he added. Given this, investors should keep a tab on the trends in the bank’s cost of funds.
Notwithstanding the losses in recent months, shares of IndusInd have risen by nearly 18% in the past one year, marginally ahead of the Nifty Bank index.
Analysts point out that a meaningful improvement in the bank’s return on equity and return on assets would be gradual.
This may cap sharp upsides in the stock hereon.
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