IndusInd Bank share drops 20% on poor Q2 show; analysts slash target price

IndusInd Bank stock faced significant pressure as disappointing July-September quarter (Q2) results for the financial year 2024-25 (FY25) led to a sharp sell-off on Friday. The share price of IndusInd Bank plummeted by 19.6% to reach Rs 1,027.8 per share during intraday trading on the BSE, marking a level not witnessed since May 2023.

At 11:40 AM, the BSE Sensex index, a benchmark, registered a decline of 627 points or 0.78%, reaching the 79,438 level.

The Q2 earnings of the bank fell short due to a combination of factors including low net interest margins, declining asset quality, significant credit costs, and a notable increase in provisions. This resulted in the weakest earnings growth among banks in the sector.

The share price target for IndusInd Bank has been reduced, with analysts foreseeing continued downward pressure on the stock in the short run.

Analysts at JM Financial observed that IndusInd Bank’s recent quarter performance was lackluster, primarily due to increased credit costs, a squeeze in NIM, and a deceleration in fee generation. Despite acknowledging the bank’s efforts in building reserves as a precautionary measure, they anticipate that the diminished growth trajectory and uncertain asset quality projection will adversely affect the bank’s profitability and could potentially depress its stock valuation multiples in the immediate future.

The target price for each share has been reduced by the brokerage to Rs 1,380 from the previous Rs 1,900, which now values the stock at 1.4 times the price-to-book value according to the FY26 earnings projections.

IndusInd Bank recorded a 39.2% year-on-year decrease in net profit to Rs 1,325.45 crore for Q2 FY25, with provisions increasing by 87% to Rs 1,820 crore for the quarter. This marks a notable financial shift for the bank during this period.

The net interest income (NII) saw a modest 5 percent year-on-year growth while experiencing a 1.1 percent decline quarter-on-quarter (QoQ) to reach Rs 5,347 crore. The net interest margin (NIM) also decreased to 4.08 percent from 4.29 percent compared to the previous year and 4.25 percent QoQ.

IndusInd Bank experienced a modest increase in net advances on the lending side, with a marginal growth of 2.7 percent quarter-on-quarter and 13.2 percent year-on-year. Specifically, the retail segment saw a slight uptick of 0.2 percent quarter-on-quarter and 10.9 percent year-on-year. This growth was offset by a decline in the microloans segment, which dropped by 11.7 percent quarter-on-quarter and 4.8 percent year-on-year, reflecting a slowdown in that particular area.

Meanwhile, there was a 3% quarter-on-quarter and 15% year-on-year increase in deposits. The growth of the current account-savings account (CASA) segment remained subdued, recording a 5% year-on-year rise and a sequential increase of 1%. IndusInd Bank’s loan-to-deposit ratio (LDR) saw an improvement, standing at 86.55%, compared to 87.3% in Q1 FY25 and 87.7% in Q2 FY24.

Analysts at ICICI Securities have highlighted a 26 basis points decline in IndusInd Bank’s Q2 FY25 yields, reaching 12.31 per cent compared to the previous quarter. This drop was primarily driven by consumer banking yields falling by 28bps to 15.07 per cent, attributed to a subpar loan composition and unfavorable LDR. They anticipate that the bank’s NIM will continue to face challenges in the short run due to an increase in MFI slippages, resulting in a revised lower target price of Rs 1,600 (as opposed to Rs 1,900).

Quality of assets deteriorates

The slippages for IndusInd Bank surged by 17% quarter-on-quarter to approximately Rs 1,800 crore, driven by a notable rise in retail slippages reaching Rs 1,680 crore. Consequently, the net slippages grew from 1.2% to 1.3% quarter-on-quarter.

The gross non-performing asset (GNPA) experienced a 9bps increase quarter-on-quarter, reaching 2.11 percent, whereas the NNPA ratio rose by 4bps quarter-on-quarter to 0.64 percent.

Nuvama Institutional Equities stated that due to the anticipated high stress in MFI in the third quarter and the sluggish performance of fee income for two consecutive quarters, they predict that the stock will continue to underperform even following a significant price correction. Accordingly, they have reduced the earnings per share (EPS) estimates by 20% for FY25 and by 15% for FY26. The share price target has been adjusted from Rs 1,690 to Rs 1,290, leading to a downgrade of the stock recommendation from ‘Buy’ to ‘Hold’.

Revised version: Kotak Institutional Equities, Emkay Global, and Phillip Capital have all reduced their target prices recently. Kotak revised theirs to Rs 1,650 from Rs 1,800, Emkay Global also adjusted theirs to Rs 1,650 from Rs 1,800, while Phillip Capital set theirs at Rs 1,560, down from Rs 1,830.