IndusInd Bank’s Shares Plunge 19%: Understanding the Steep Drop and Analyst Outlook

On October 25, 2024, IndusInd Bank Ltd. shares took a significant hit, plunging almost 19% following the release of disappointing Q2 FY25 earnings. Investors reacted sharply as the bank reported a 39.5% year-on-year drop in consolidated net profit, a downturn that left analysts and shareholders concerned about its growth trajectory. Here’s a closer look at the factors contributing to the bank’s underperformance and what financial experts predict for the road ahead.

What Triggered the Decline? Key Financials from IndusInd Bank’s Q2 FY25 Results

1. Plummeting Net Profit
   IndusInd Bank reported a stark 39.5% drop in consolidated net profit, down to ₹1,331 crore from ₹2,181 crore in the previous year’s quarter. This decrease marked a concerning trend, signaling a broader profitability issue despite revenue inflows from core banking activities.
2. Modest NII Growth but Missed Targets
   While the bank’s net interest income (NII) grew by 5% to ₹5,347 crore, this increase fell short of analysts’ expectations. As one of the critical indicators of a bank’s earning power from interest-based activities, IndusInd’s NII growth undershot market expectations, suggesting tighter margins and higher borrowing costs.
3. Shrinking NIM: An Indicator of Profitability Pressure
   The net interest margin (NIM) decreased from 4.29% last year to 4.08%, indicating a tighter spread between lending and borrowing rates. For banks, NIM is a crucial metric, with even slight reductions impacting overall profitability. This decline, coupled with high funding costs, has raised concerns over the bank’s ability to maintain profitable lending operations.
4. Worsening Asset Quality and Rising NPAs
   The bank’s asset quality deteriorated, with its Gross Non-Performing Assets (GNPA) ratio rising to 2.11% from 2.02% in the June quarter. In absolute terms, GNPAs grew to ₹7,638.5 crore, and Net NPAs (the non-performing assets after provisioning) increased to ₹2,282 crore. This increase in defaults necessitated an 87% rise in provisions, amounting to ₹1,820.1 crore, which weighed heavily on profits.
5. Decline in Operating Profit
   IndusInd’s operating profit also dipped by 7.2% year-on-year, further underscoring the bank’s operational challenges. While loan and deposit growth remain robust—13% and 15%, respectively—revenue from core banking operations has struggled to offset rising costs and the need for increased provisions.

Analyst Reactions: Mixed Ratings Amid Challenging Outlook

Following the release of Q2 results, several financial analysts revised their ratings and targets for IndusInd Bank. Here’s how major brokerages responded:

• Nomura
  Nomura retained its “neutral” rating but significantly reduced its price target from ₹1,580 to ₹1,220. The firm revised its Return on Equity (RoE) expectations to a range of 11-13% for FY25-FY27, reflecting concerns over IndusInd’s profitability prospects and what it described as a “challenging” outlook.
• Macquarie
  Macquarie maintained an “outperform” rating but acknowledged potential asset quality risks in the bank’s microfinance book. Their price target of ₹1,690 reflects a cautious optimism, although they noted that worsening defaults in the microfinance segment could pose risks to IndusInd’s ability to meet a 1.8% Return on Assets (RoA) target.
• Citi
  Citi retained its “buy” rating but lowered its price target from ₹2,010 to ₹1,630, citing expectations of slower loan growth and a modest uptick in fee-based income. Citi adjusted its earnings forecasts downward by 18-22% for FY25-FY27, aligning with a broader trend of tempered growth projections.

Despite these downgrades, most analysts remain cautiously optimistic. Out of 50 analysts covering IndusInd Bank, 41 maintain a “buy” rating, with only eight suggesting “hold” and one recommending a “sell.”

Investor Takeaway: Can IndusInd Bank Recover?

The latest results from IndusInd Bank highlight pressures on profitability, with issues ranging from rising NPAs to a diminishing NIM. However, IndusInd has demonstrated resilience through healthy loan and deposit growth, which suggests potential for recovery if operational efficiencies can be improved and asset quality risks managed effectively.

For investors, the next few quarters will be crucial to gauge IndusInd’s ability to manage rising provisioning costs and return to a stable growth trajectory. While concerns persist, the bank’s low valuations may present an opportunity for those with a high risk tolerance.

Bottom Line: A Rough Quarter but Hope for Long-Term Gains

IndusInd Bank’s Q2 FY25 performance raised red flags for analysts and investors alike, but the bank’s fundamentals, including its steady loan growth, leave room for cautious optimism. With significant adjustments from brokerages and a diversified investor outlook, IndusInd’s path to recovery may well hinge on effective risk management and renewed focus on boosting profitability in the quarters ahead.

Disclaimer:

The information provided in this blog is for informational and educational purposes only and should not be construed as financial or investment advice. The analysis, views, and opinions expressed here are based on publicly available information and data, and while every effort has been made to ensure accuracy, there is no guarantee of completeness or reliability.

Investors should conduct their own research, consider their personal financial situation, and consult with a qualified financial advisor before making any investment decisions. Neither the author nor the publisher assumes any responsibility or liability for any financial losses or damages incurred as a result of the information provided in this blog.