IndusInd Bank shares slump 19% as Q2 numbers miss estimates, analysts cut target price

IndusInd Bank share price tumbled 19% to a new 52-week low of ₹1,034 per share in intraday day on Friday, October 25. This decline followed the bank's disappointing results for the September quarter, which missed Street estimates on all parameters and prompted analysts to lower their target prices for the stock.

The decline in bank shares can also attributed to the lender's announcement that it would not meet its full-year loan growth forecast, following an unexpected drop in second-quarter profits due to stress in microfinance loans.

Domestic brokerage firm Motilal Oswal said that the bank had a weak quarter, marked by higher provisions due to the establishment of a contingency buffer of ₹5.25 billion, reduced other income, and slower growth in higher-yielding loans.

The bank's net interest margin (NIM) contracted sharply amid rising costs and sluggish growth in high-yielding assets. Asset quality ratios deteriorated slightly as fresh slippages remained elevated, primarily within the consumer finance segment.

In light of the bank's underperformance, Motilal Oswal revised its target price lower for the stock to ₹1,500 per share while maintaining a 'Buy' rating. Similarly, Nuvama Institutional Equities lowered its target price to ₹1,290 per share and downgraded the stock from 'Buy' to 'Hold.'

"In Q2, IIB posted the weakest earnings in the sector so far with moderating loan growth, a QoQ fall in NII, a rise in slippage, 30DPD in MFI, a sharp increase in credit cost, and low fees for a second quarter in succession. Even excluding one-time provisions of ₹5.25 billion, PAT was below consensus. RoA stood at 1%, down from 1.7% QoQ. CET1 fell 94 bps QoQ due to a hike in MFI risk weight from 75% to 125%," said Nuvama.

As MFI stress is expected to remain high in Q3 and fee income has been sluggish for the past two quarters, the brokerage believes the stock will continue to underperform despite the recent sharp price correction.

Global brokerage firm Goldman Sachs has lowered its target price for the stock to ₹1,430 per share, while HSBC has cut its target to ₹1,500 and Jefferies has reduced its target to ₹1,470. Macquarie has also lowered its target price to ₹1,690 per share.

Meanwhile, IIFL has downgraded IndusInd Bank to 'Add' and revised its target price to ₹1,300 per share. Nomura has retained its 'Neutral' rating on the bank, cutting its target price to ₹1,220 per share.

Q2 earnings: Rise in slippages, fall in margins and huge surge in provisions

The bank reported a PAT of ₹1,330 crore for Q2 FY25, a drop of 40% YoY, impacted by higher-than-expected provisions, including a contingency provision of ₹525 crore for the quarter. As of September 2024, the bank now holds a total contingency buffer of ₹1,525 crore.

Fresh slippages rose by 17.1% QoQ to ₹1,798 crore, primarily driven by an increase in slippages within the consumer finance segment, which accounted for ₹1,680 crore.

Consequently, the gross non-performing assets (GNPA) and net non-performing assets (NNPA) ratios increased by 9 basis points and 4 basis points QoQ, reaching 2.11% and 0.64%, respectively, due to elevated fresh slippages.

For the first half of FY25, the bank's PAT stood at ₹3500 crore, a decline of 19% YoY. Analysts project a PAT of ₹3880 crore for the second half of FY25, which would represent a 17% decrease YoY.

The net interest income (NII) grew by 5% YoY to ₹5350 crore, which came in line with expectations, while other income fell by 10.5% QoQ to ₹2185 crore, missing estimates. NIM contracted sharply by 17 bps QoQ to 4.08%

Previously, the bank had guided for loan growth of 18-22% for FY25. However, given its cautious outlook on unsecured lending, analysts now estimate loan growth to be around 13%.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.