MUMBAI: When the neighbour’s house is on fire, one cannot escape the heat. This explains why shares of IndusInd Bank have been battered of late following the collapse of peer Yes Bank.

The private lender’s stock, once priced to perfection, has fallen over 56% so far this year, with 38% fall coming in the past seven trading sessions. Only some of this can be attributed to the secular fall in equities due to the pain emanating from the COVID-19 outbreak.

A lot is due to concern that smaller private banks could face some deposit flight in the wake of the Yes Bank debacle.

“The key factor separating vulnerable banks from stronger peers is a low-cost stable deposit franchise,” said analysts at Anand Rathi Share and Stock Broker Ltd in a note, adding that smaller private banks will likely see lower deposit growth going ahead.

IndusInd Bank too is likely to see a lower deposit growth in the coming quarters. The bank’s low cost deposits form roughly 40% of its total deposit base.

However, the Hinduja Group, promoters of the bank, have asked regulatory permission to increase their stake in the lender to 26%, according to an Economic Times report. Current rules cap promoter holding at 15% in a bank.

This could shore up some confidence and investors have already taken note of it. Shares of the lender were flat today’s trade.

That said, there have been jitters specific to the bank on asset quality and the leadership transition which are yet to play out.

Current chief Romesh Sobti is due to retire this month and in his place Sumant Kathpalia would take charge. That Kathpalia is an insider credited with building the successful consumer banking vertical of the lender should give comfort. But the risks to the bank’s balance sheet cannot be ignored.

IndusInd Bank’s slippages rose in the December quarter and gross bad loans formed 2.18% of the loan book, far higher than the 1.08% two years ago. The current quarter has been brutal for small and even mid-sized businesses due to economic slowdown and the virus outbreak. Ergo, IndusInd Bank is bound to see pain from this segment. Roughly 21% of its corporate loan book comprises mid-sized and small corporates.

That the bank has a large exposure to the automobile industry through vehicle loans (as much as 28% of total loan book) is not helping either, given the current protracted slowdown in the auto sector.

Analysts believe that asset quality concerns will persist and weigh on share price going ahead. “An orderly transition to a new CEO and stability in asset quality are key near-term catalysts,” said analysts at HSBC Securities and Capital Markets (India) Pvt Ltd. in a 21 February note.

After the massive fall year-to-date, shares of IndusInd Bank trade at just 1.1 times its estimated book value for FY21, reflecting investor concerns about asset quality.

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