Bank stocks under pressure as lenders flag stress in MFI portfolio, weaker asset quality

IndusInd Bank, in its latest second-quarter update, reported a surprise 39 percent on-year drop in net profit

Bank stocks were under pressure on October 25 in an overall weak market led by 20 percent drop in IndusInd Bank shares as it flagged stress in its micro-finance portfolio and deteriorating asset quality picture. Others like AU Small Finance Bank, Canara Bank, PNB, IDFC First Bank, and Bank of Baroda also bore the brunt of the worst of selloff and declined in the range of 2-6 percent.

Apart from IndusInd Bank, Kotak Mahindra, RBL Bank, and AU Small Finance Bank have reported stress in their asset quality, with significant increase in bad loans driven by stress in credit card and microfinance loans.

IndusInd Bank, in its latest second-quarter update, reported a surprise 39 percent year-on-year drop in net profit due to higher provisions, shrinking margins, and worsening asset quality. Following a disappointing Q2 performance, brokerages slashed target prices of the lender. Nuvama Institutional Equities, for instance, cut target price to Rs 1,290 apiece and downgraded the stock to 'hold' from 'buy.'

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Nirmal Bang, too, downgraded the stock to 'hold' from 'buy' and cut target price to Rs 1,443 from Rs 1,653. "The stock will see an overhang from the near-term perspective owing to slowdown in loan growth, stress in secured and unsecured loan segments, pending RBI nod from Sumanth Kathpalia's tenure extension," they said.

Meanwhile, RBL Bank had also said that the stress in micro-finance book is due to industry-wide issues. Fresh slippages of the lender nearly doubled to Rs 1,026 crore during the quarter, wherein 70 percent came in from credit cards and the rest from micro-finance.

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