IndusInd Bank stock plummets after Q2 shock – Analysts still urge ‘buy’! Here’s why they’re hopeful

In a dramatic setback, IndusInd Bank reported a steep 39% decline in its second-quarter net profit, rattling investors and resulting in a significant drop in its stock price. Despite these challenges, financial analysts continue to rally behind the bank, maintaining their ‘buy’ recommendation on IndusInd Bank, citing optimism around a recovery in margins and a strategic optimization of the lending portfolio. This commitment from analysts underscores confidence in the bank’s recovery potential despite current struggles.

Q2 financial performance disappoints as profit, margins decline

IndusInd Bank’s performance for the quarter ending September 2024 fell considerably short of market expectations. The bank’s net profit plunged to ₹1,325 crore, down from ₹2,181.47 crore a year earlier. This significant decline missed analyst forecasts, which had expected profits closer to ₹2,138 crore. Furthermore, IndusInd Bank’s net interest income rose modestly by 5%, reaching ₹5,347 crore, yet this increase was not enough to offset the drop in profitability.

A major concern for investors was the bank’s shrinking net interest margin, which fell to 4.08% from last year’s 4.29%. Analysts noted that this margin contraction, which includes a year-over-year decrease of 21 basis points and a sequential quarterly decline of 18 basis points, is an indicator of deeper challenges facing IndusInd Bank’s core lending operations.

Provisions surge as asset quality raises concerns

IndusInd Bank attributed part of the profit drop to a sharp rise in provisions and contingencies, which surged to ₹1,820 crore from ₹973 crore in the previous year. The increase in provisions, close to double on a year-over-year basis, was largely tied to rising stress in its microfinance segment. The microfinance division, which accounts for approximately 9% of IndusInd Bank’s total loan portfolio, has experienced heightened risk levels, compelling the bank to allocate more resources toward loss coverage. Furthermore, the gross non-performing assets ratio increased to 2.11% from 2.02% in the previous quarter, highlighting a gradual deterioration in asset quality.

Market reaction: IndusInd Bank stock faces heavy losses

IndusInd Bank’s Q2 report rattled investors, triggering a steep 15% drop in its stock price on October 25, 2024. This marked the stock’s most significant single-day fall in over four years, reflecting market fears about the bank’s performance trajectory and growing concerns around asset quality and profit sustainability. On a year-to-date basis, IndusInd Bank’s stock has tumbled by approximately 34%, drastically underperforming the Nifty Bank index, which has managed to grow by 8% in the same period.

Analysts retain ‘buy’ tag, betting on recovery

Despite the Q2 turmoil, many analysts have chosen to hold steady on their ‘buy’ recommendation for IndusInd Bank. Experts believe that while short-term challenges remain, the bank’s longer-term strategy could bring about a recovery in its financial metrics. Analysts noted that IndusInd’s challenges in the microfinance sector are likely to be temporary, with the bank expected to prioritize tighter credit standards. They indicated that this shift could fortify the bank’s financial foundation, although it may result in slower growth in the near term.

Strategic initiatives: focus on lending portfolio optimization

IndusInd Bank is making concerted efforts to navigate the current storm, including an emphasis on diversification within its loan portfolio. The bank’s move to reduce dependency on microfinance and bolster exposure to other lending areas is a key component of its long-term plan. Additionally, IndusInd Bank aims to improve operational efficiencies and reduce its cost of funds, measures that could help restore its net interest margin in upcoming quarters. Analysts are optimistic that these efforts, combined with the bank’s prudent approach to credit risk, will gradually stabilize its profit margins.

Expert opinions highlight resilience and strategic foresight

Financial experts see a potential path to recovery for IndusInd Bank, especially with its continued focus on managing asset quality and prioritizing margin improvement. Industry analysts have underscored the bank’s capital adequacy ratio, which remains strong at 16.51%, and a provision coverage ratio of 70%, suggesting that IndusInd Bank has ample resources to weather potential losses. This resilience provides a buffer that could support the bank in maintaining financial stability while it works through the current challenges.

Cautious optimism as IndusInd Bank strategizes for recovery

IndusInd Bank’s latest financial report has undeniably shaken investor confidence, prompting a steep stock decline and concerns over profitability and asset quality. However, the unwavering ‘buy’ ratings from analysts reflect a belief in the bank’s capacity to navigate the challenges through strategic lending adjustments and an emphasis on cost efficiency. While immediate hurdles remain, the bank’s proactive measures offer hope for a rebound in the medium to long term, making it one to watch in the coming quarters.