stock market india

How did IndusInd bank share price went from Rs. 1530/- to Rs. 370/- in just 3 months of the year 2020?

Background:

Est. in 1994, IndusInd Bank is a new-generation private-sector bank. The bank has a pan-India presence, with 1851 Branches and 2721 ATMs spread across 746 geographical locations of the country as on Dec 2019.

It has four divisions: corporate and commercial banking, consumer banking, global markets group, and transaction banking.

Before understanding why the share prices tumbled, first lets have a look what the brokerage houses had a rating on this counter:

My first message is to never ever rely on these brokerage reports for your buy sell or hold call.

Lets look how the share prices moved:

Now lets try to understand what went so wrong for this bank that the stock price witnessed a 70% erosion.

As per media report viz. Livemint report as on April 20, 2017

Credit ratings history of Jaiprakash Associates by CARE : On July 23, 2015 the ratings for Jaiprakash Associates was downgraded to ‘D’, which means DEFAULT, due to delay in servicing of debt obligations by the company due to its weak liquidity position.

The company was referred to NCLT and thereafter, UltraTech in July 2016, announced that it will acquire Jaiprakash Associates’ cement plants, with a total capacity of 21.2 million tonnes p.a.

Now here is the catch, Jaiprakash Associates was declared D on July 23, 2015 and was being referred to NCLT, still in 2017, Indusind Bank goes ahead to lend Rs. X as bridge loan, so as to meet the claims of few creditors, who otherwise would not have given their consent for the sale of its cement business to UltraTech. OF the total Rs. X amount, Rs. 122 crs. is a certain % of the total loan size which has been set aside as standard provisioning.

There was no reason for Indusind to go and lend to a Default company in the first place. Lets understand, if Jaiprakash Associates was being referred to NCLT, then its pretty obvious that all of its assets would have being already claimed by its exiting lenders and other creditors. So pretty obvious that Indusind would have gone ahead and lent this fresh loan for no tangible underlying collateral. Now in the banking space, if you don’t have a collateral then the rate of interest for such loans is very high. (Eg: your personal loan and credit card loans interest rates are always higher than the mortgage loans). See the excerpt of the transcript, which clearly says that Mr. Sobti just had a undertaking latter that Jaiprakash Associates will pay off the bank.

Also the bank charges hefty processing fees along with very high interest rates, for such non-collateral based loans and like to label this as “acquisition /bridge financing.”

However on a clean basis the bank could have lent it to could have lent the loan to ‘AAA’ rated Ultratech Cement and then UltraTech could have passed on the loan to Jayprakash Associates. However that would have given a normal spread for the bank. Remember higher interest is charged on the low rating companies (as the risk is high) and lower interest is charged on the high rated companies (As the risk is low).

Excerpts from the analyst transcript:

Banks generally are in the race of increasing their fee based incomes as these income are considered low risk and hence fetches better valuation in the stock market.

There is a conflict of interest as well, when it comes to the management, when they are rewarded by ESOP’s, obviously skin in the game is good, but they would want the prices of their stocks to soar to cash in the ESOPs at higher prices. This could also be one of the reasons why the management of IndusInd bank & Yes Bank were more focusing on fee based income.

But the D-street was calm about it, and the brokerages were still giving a BUY recommendation of this Bank.

Further, in the analyst call Mr. Sobti was being asked about the RBI’s notification on divergence reporting to which Mr. Sobti replied that there wont be any impact on P&L and the number wont be large.

“What is a divergence?”

RBI aims at improving transparency in asset classification and prevents under-reporting of bad loans.

Banks are required to disclose divergence when the additional provisioning for NPAs assessed by RBI exceeds 15% of the reported profit before provisions and contingencies for the reference period, (in 2019, RBI tweaked that 15% to 10%).

In FY 2017 annual reports the Bank reports the figures as per RBI divergence reporting for FY 2016

Remember, Mr. Sobti’s statement that there wont be much difference, here we are talking about Gross NPA of 1337 crs. basis RBI findings which is 72% rise from the Bank’s reporting, similarly Net NPA has shot by ~100% from the original reporting. If this is not much , I wonder what would be much for Mr. Sobti.

Coming to FY 2018 results, similar story here on the divergence part, a divergence by a huge margin

Coming to Year 2017, RBI imposed Rs 3 crore penalty on IndusInd Bank for breaching rules on income classification norms. A statement issued by RBI said that the penalty was imposed after the regulator observed violation of various regulations issued by the RBI on non-performing loans and extension of non-fund based limits.

And the icing on the cake was when the mis-fits were crowned; as Indusind was made a part of Sensex (BSE Index) on Dec 2018.

The market, analysts, the TV guys all were blindfolded and no one cared to serious red flags in the Indusind Bank the huge divergences in asset quality, the under provisioning by the bank (and tit was not one off), the fines by RBI on the bank for violation of regulation.

Then iN Sep 2018, comes the IL&FS fiasco, the bank had provided a bridge loan of a substantial amount to IL&FS just 3 months ago before the IL&FS seems Indusind bank likes to jump in the fire, earlier example of Jaiprakash Industries and then IL&FS. Gain if one would have looked in depth IL&FS financials, a serious banker would never have lent any money.

The performance got seriously dented this time

The rise in the provision and the deterioration in the asset quality due to exposure of Rs. 3004 crs. to ILFS group , which was ~12% of the bank’s capital as on September 30, 2018.

Now this IL&FS episode already had sent shock waves to the D-Street and this was the start of the fall in share prices for Indusind Bank.

Therafter with some disclosures, more cockroaches came into surface , Indusind disclosed that it has a combined exposure to three debt-laden companies viz., Zee, DHFL and Anil Ambani led Reliance of about Rs.2100 crore or 1.1 percent of the loan book.

In the above note , refer note 2, wherein the bank has mentioned that it has provided 100% for its exposure on the HFC. Incidentally, this exposure seems to be DHFL exposure, which clearly means. Also in the con-call the management mentioned that they found two accounts as fraud, one the HFC & the other being a travel company. My guess is the first one being DHFL and the other one could be Cox & Kings.

It is also mentioned that 27% of the exposure is coveree in form of listed shares. Now given the free fall of the market what value shall these almost defunct companies have? Basically I would say there is little or not much collateral and hence the bank is sitting on serious Toxic assets.

From the table we can see, the quality of the assets has only deteriorated both in absolute and % terms.

On March 30, 2010:

The bank released a presentation and mentioned that they have lost 10-11% of deposits.

Wholesale deposits are generally chunkier in nature, and this kind of amount looks like a major state deposit amount, if a major state doesn’t feel safe to keep its deposit with this bank, there shouldn’t be an iota of doubt that retail depositors should not have deposit exceeding the deposit insurance amount with this bank, which is Rs. 5 lakhs.

Another Important observation is when the government ‘made’ other bankers to invest in Yes Bank the list of bankers were:

SBI
ICICI Bank
HDFC Bank
Kotak Bank
Axis Bank
Bandhan Bank &
Federal Bank

Isn’t it surprising, that a small finance bank Bandhan Bank was a investor but no mention of Indusind Bank or RBL which are much bigger than Bandhan Bank; I hope you get the message loud and clear. (Definitely the next banks in line, the share prices already got hammered )

Now that Mr. Ramesh Sobti has stepped down and with the new CEO coming into, we can be certain that the kitchen sinking process will be initiated here as well, just like the Yes Bank.

I don’t want to be nasty, but here it clearly seems like the management was only greedy to gain higher fees resultant took high risky bets, without collateral, and not even thinking that what if the capital is never returned. Also there are serious lapses on the Bank’s credit and risk team, which has approved these transactions. Further serious concerns on governance and the intent is evident, due to the mis-reporting, with huge divergences back to back for two years.

Indusind Bank, is indeed sitting on a time bomb of toxic assets, and hence the share prices witnessed serious erosion in no time.

Technical charts:

In the month of March 2020 alone the stock witnessed a crash of Rs. 783. The stock hit a All time low of Rs. 235.55. the next support for the stock is Rs. 195 levels.