Stock Review: INDUSIND BANK

INDUSIND Bank's results for the September 2010 quarter indicate that the bank is catching up with its larger peers in the industry in terms of growth, margins, and asset quality. The bank has shown a sharp turnaround in its performance in the past two years. A couple of years ago, the bank was struggling with its asset quality as the net non-performing assets (NPA) stood as high as 2.2%. However, it has consistently improved its numbers since then. Net NPAs have now come down to 0.4%. What is commendable is the fact that the bank has grown its loan book at high rates but without adversely impacting its asset quality. The bank's loan book grew at 33% in the September quarter year-onyear. With this, its average advances growth has touched 25% in the last five quarters.

   The bank's net interest margin (NIM) stood at a nine quarter high of 3.4%. NIM is a measure of the spread between lending and borrowing rates. Among other big banks, HDFC Bank and state owned Punjab National Bank have been able to maintain NIMs at such high levels.

   Most banks with NIMs in excess of 3% have around 30% of their deposits just in the form of low-cost current account and savings account (CASA). Currently, the bank's CASA stands at 25% of its total deposits. Given this, there seems to be potential to improve this spread further. However, the recent hike in interest rates by the RBI made most banks increase their deposit rates to attract depositors. This might create pressure on NIMs in the coming quarters.

   On the liability side of the balance sheet, the bank grew its deposits by 37% in the September quarter compared with the year-ago period. The deposits have outgrown advances. A higher deposit growth as against advances' growth typically leads to a lower credit deposit ratio. A lower credit deposit ratio indicates that the bank has not been able to lend the deposits it received effectively.

   The bank reported a capital adequacy ratio (CAR) of 16.2% at the end of the September quarter, much more than the minimum 9% stipulated by the Reserve Bank of India (RBI). A strong capital base indicates that the bank has been efficiently managing the liquidity risk and it intends to scale up the operations.

   The bank has displayed ability in outgrowing its industry in terms of loan book growth on a consistent basis for the past five quarters. This, coupled with the improved asset quality and high margins, shows that the bank appears all set to grow at a much higher rate than the industry average in the coming quarters as well.