Can new CEO Sumant Kathpalia steer IndusInd in a storm?

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A round four years ago, Romesh Sobti, the then managing director of IndusInd Bank, had invited the lender’s top management for an exercise to draw up a three-year plan. The leadership team at the Hinduja Group-promoted bank then was 40-people strong. When a similar exercise was done around two months ago, the number of executives who participated had more than doubled. In fact, a cutoff at 90 had to be imposed for the meeting.Sobti, who retired as MD of IndusInd Bank in March, sees this as a sign of a carefully cultivated management “bench strength playing out”. It is probably the best thing — along with a strong track record of profitability — that Sobti has passed on to his successor. If not for these, Sobti would have handed over a bank in turmoil to Sumant Kathpalia, the head of the consumer and retail business, who took over as the MD and CEO of Indusind Bank in late March.The IndusInd Bank stock has had a tumultuous March and April. The trigger for the meltdown on the bourses was the Reserve Bank of India (RBI)’s moratorium on March 5 on withdrawals from another private sector lender, Yes Bank. That and the general negative sentiment due to the Covid-19 pandemic pushed the bank scrip on a downward spiral.75100057From Rs 1,074.70 on March 5, the IndusInd bank stock has lost 60% of its value, closing at Rs 395.45 on April 9. In the same period, the BSE banking index, Bankex, lost 33%.A Maharashtra government diktat to its own departments to move out deposits from private sector banks also hurt IndusInd as the lender saw a sudden 10% drop in deposits. The CASA ratio — the ratio of deposits in the current and savings accounts, essentially cheap funds for a bank — as a percentage of total deposits and borrowings also dropped from 42.4% in December 2019 to 40.5% in March 2020.The leadership transition happened in the middle of all this, on March 24. The promoters, the Hinduja family, also came under the scanner as it emerged that 23.8 million shares (3.43% of current paid-up capital) of the bank were pledged by the promoter firm, IndusInd Mauritius, with Citibank. Hindujas hold around 14.4% of the bank, a little less than the 15% cap on corporate holding in banks imposed by RBI.75100027In mid-March, the Hindujas sought RBI permission to raise their stake to 26%. The request made before Kathpalia took over was to reaffirm their commitment to the bank. By the end of March, they had also repaid Citibank to clear the pledge.The bank itself borrowed quickly to fill the hole left by the withdrawals of government deposits. The Economic Times reported in early April about efforts to raise “confidence capital” from private equity funds.IndusInd Bank has a solid track record of profitability. It reported Rs 3,301 crore in profit in 2018-19, and Rs 4,117 crore for the nine months ended December 31, 2019. And yet, the way it lost the confidence of investors in March 2020 poses the question whether there is something amiss in its business model.IndusInd Bank did not reply to queries emailed for this story. The Hinduja Group too did not respond to queries.75100103A Bank in TransitionWhile the bank was started in 1994, its journey as a consumer-focused lender really began when Sobti joined IndusInd from ABN Amro in 2008, with a large team in tow. “The real turnaround story of IndusInd Bank began when Sobti and his team moved in,” says Vimal Bhandari, executive vice-chairman of Arka Fincap.A more retail and granular customer base not only gives a bank a source of cheap funds from CASA, but also provides a large base of borrowers and customers that will protect it against sudden large withdrawals or large loan defaults, which can happen with corporate loans and deposits.Even during the present meltdown in markets and withdrawal of deposits by the state government, very few retail depositors withdrew their money from IndusInd, Sobti told The Economic Times in an interview in mid-March.CASA and retail term deposits make up 65% of the bank’s deposit base. Consumer banking loans comprise 54% of its total loans.The move towards a bigger retail base had started through acquisitions and mergers. In 2004, the vehicle finance business of Ashok Leyland, another Hinduja Group firm, was merged into the bank. Under Sobti, IndusInd acquired the credit cards business of Deutsche Bank in 2011. In 2015, it took on the diamond and jewellery financing business of Royal Bank of Scotland. In 2017, IndusInd Bank acquired India’s second largest microfinance institution, Bharat Financial Inclusion, in a Rs 15,000 crore deal. This acquisition stressed on the strategy of the bank to become more consumer and retail focused. While the deal added Rs 10,000 crore worth of MFI loans to the bank, the real value it brought in were the 6.8 million more customers to the bank’s customer base of 10 million.75100181Chairman of Inditrade Capital Sudip Bandyopadhyay says the acquisition of Bharat Financial Inclusion can define the future of IndusInd Bank as it gives the lender a huge customer base. Bandyopadhyay, who has the experience of running a microfinance business, says it is relatively easy to convert a microfinance customer into a depositor. “Acquiring a retail customer base comes at a huge cost. Banking relationships are usually sticky. The likes of Kotak or Yes Bank tried to do it by offering higher interest rates on savings accounts,” he adds.The transition started by Sobti has not yet been completed and the recent events have shown that IndusInd is still open to shocks from its lumpy deposits and advances.“IndusInd Bank faces problems both on the asset as well as the liabilities side,” says Nitin Aggarwal, an analyst at Motilal Oswal. “The liabilities side is facing headwinds due to the outflow of deposits. The asset-side stress is yet to come to the fore. But one needs to keep a close watch on the bank’s exposure to the commercial vehicle, microfinance and gems and jewellery sectors, which could be hit due to the sharp slowdown we are seeing both domestically as well as internationally.The bank’s corporate exposure to companies, like Vodafone, was already into question and this will add to that stress.”Bandyopadhyay, too, says the lender may see some stress this time. “IndusInd was not hurt by the first phase of Indian corporate insolvencies that were in sectors like steel and infrastructure, as it did not have much exposure to these. However, we might see a second lot of insolvencies involving telecom, and this might hurt the bank. If IndusInd can survive the pandemic and the lockdown phase, its future looks good.”A Banker’s PivotOn March 30, the bank did a call with analysts. Earlier this week, it also released provisional numbers up to March 31, 2020.Analysts at brokerage Nirmal Bang, who had attended the call, wrote in a report on March 31 that they saw a strategy pivot at the bank due to which growth in advances (loans) would be much slower, possibly half of what they used to be in the past. Authors of the report Rahul Garg and Arjun Bagga wrote: “…a major overhaul may be underway at IndusInd Bank. This would include ‘tweaks’ at the management level and pivoting the business strategy in a direction such that asset growth is a function of liabilities (and not the other way). One of the elements of the overall plot includes de-focusing on bulk deposits.”While slower growth is a given after the impact of the Covid-19 pandemic, IndusInd Bank might not have had the option to take another route in any case.75100208A quick fund raise, unless the RBI allows the Hinduja’s to raise stake, may be out of the question. A Mumbai-based investment banker pointed out that many banks would have to raise capital in the next 12 months, and deals would take time as there was too much ambiguity right now.And then there is the Yes Bank impact.HR Khan, former RBI deputy governor, says he has seen trust in private sector banks eroding in the last few months. It is mainly because in the past, these banks have relied heavily on bulk deposits and “sharp practices to garner government and corporate deposits.”One of the issues that worries analysts and investors alike is the retirement of Sobti at this juncture, though he will be retained as a full-time advisor. The IndusInd bank has a fully professional board. But it has seen the retirement of some senior professionals like Ashok Leyland veteran R Seshasayee, who chaired the board for a long time.Of course, investors can breathe easy as Kathpalia is an IndusInd veteran, had led the key consumer business and was a part of the team that came with Sobti from ABN Amro. He took over as MD & CEO less than a month after the RBI approved his appointment. An independent director on the IndusInd board says the current board, chaired by veteran public sector banker Arun Tiwari, operates independently and there is little involvement of the Hinduja Group or the family at the board level.The bank could not have announced the CEO’s name any sooner, he says. “It is not easy for a bank like IndusInd to find a CEO from outside. While choosing internally, you have to keep the balance.” Sobti is likely to stay around as advisor for a year and mentor the new leadership. “Letting professionals run the bank has improved results compared to the earlier period,” the director adds, comparing Sobti’s tenure with the earlier period.Given that record, it is likely that the new CEO will get enough time and elbow room to execute his strategy. He will anyway have a strong bench strength to back him.

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