IndusInd Bank see-saws wildly but not yet future perfect

What explains the 46% bounce in the stock price of IndusInd Bank on March 26, 2020?

Mar 27, 2020 10:03 IST India Infoline News Service

The markets appeared largely impressed as IndusInd Bank rallied by 46% on September 26, 2019 from its multi-year lows. However, the year to date chart is fairly revealing.

Data Source: NSE

A couple of things emerge from the charge above that captures the stock price of IndusInd Bank since Jan-2020 along with the range volatility (ratio of High/Low gap to closing price). While the weakness in the stock persisted from January onwards, the real cracks started appearing in the first week of March after the RBI issued a moratorium on Yes Bank. Market analysts and traders feared that in terms of asset quality, IndusInd was closest to Yes Bank, and hence could face a similar run on deposits. That resulted in the stock falling early 70% post the Yes Bank moratorium. Since the fall in price was led by a sharp rise in volatility, one can safely attribute part of the bounce to short covering in the stock.

But, why were analysts equating IndusInd Bank with Yes Bank and why did the stock correct so sharply? Like Yes Bank, even IndusInd Bank had been forced by RBI to disclose serious divergence between the RBI approved NPAs and the reported NPAs. This led to apprehensions that IndusInd Bank may have to make higher provisions for NPAs in coming quarters. Secondly, like in the case of Yes Bank, there were fears that IndusInd Bank also had substantial exposures to troubled groups like Jet Airways, DHFL, Reliance ADAG and smaller companies like McLeod Russell and Cox & Kings. All these were expected to add to the stress. Thirdly, like Yes Bank, IndusInd Bank also had succession issues as Romesh Sobti would hang his boots in March 2020.

What explains the 46% bounce on March 26, 2020? While short covering was part of the story, it was also about the stock being oversold. It remains to be seen if the bounce sustains or eventually fizzles out. However, markets are veering around to the view that some of the fears may have been overdone. For one, the Hinduja Group has come out and reiterated faith in the bank, assuring they would back IndusInd Bank all the way. That helped market sentiments on a day when Euro Pacific Fund had sold 3.6 million shares of the bank. The bank also managed its succession smoothly. The appointment of Sumanth Kathpalia, an insider, as the CEO will ensure continuity in terms of banking policy and strategy. Lastly, the asset quality of the bank may have some issues but does not look as drastic as to warrant a run on deposits. The quick rescue of Yes Bank also helped put paid to such fears.

The real challenge for IndusInd Bank will be the same as other banks; where will growth come from? Clearly, commercial, industrial and retail portfolios are likely to remain under stress after the Coronavirus pandemic. The game will be all about rethinking banking out of the box.

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