India’s private sector banks are facing their toughest test yet with a virus outbreak putting their earnings at risk, even as the collapse of a peer bank raises questions on deposits.

IndusInd Bank Ltd has been the worst hit by the crisis. The bank’s stock dropped 15% on Tuesday after the lender revealed in an investor call that it has lost 10-11% of its deposits since Yes Bank Ltd crumbled earlier this year. Just two weeks ago, IndusInd Bank had indicated that it had lost only 2% deposits. State governments no longer think it is safe to keep money in the private sector bank.

An increasing worry is the bank’s exposure to vulnerable sectors against the backdrop of the lockdown to contain the covid-19 spread. The lender will have a tough time maintaining its asset quality because of the lockdown, say analysts.

View Full Image Balancing the troubles





“Near-term asset quality stress is inevitable due to lockdowns, mainly in cards/personal loans, micro finance, real estate/loan against property and vehicle financing business, but moratorium should help limit NPAs," wrote analysts at Emkay Global Financial Services Ltd in a note. NPAs are non-performing assets.

ICICI Securities Ltd’s analysts have cut IndusInd’s earnings per share estimates by 23% for FY20 and a massive 65% for FY21.

IndusInd Bank has indicated that credit costs would escalate to 2-2.1% of loans for the March quarter from 0.6% in the December quarter.

That said, the massive fall of 76% so far this year in valuation makes the stock attractive. Much of the fall was not just because of worries over asset quality, but more due to fears over the deposit franchise.

Of course, IndusInd Bank’s peers, too, have not escaped the heat. For instance, shares of the largest private sector lender HDFC Bank Ltd have dropped 34% since January, while ICICI Bank Ltd and Axis Bank Ltd have lost 40% and 49%, respectively.

Covid-19 is a big factor, but the misery in private sector bank stocks is also a symptom of a deeper problem of financial stability that the Reserve Bank of India (RBI) is battling right now.

To be fair, RBI has taken several measures, including a rescue package in record time, for Yes Bank. Governor Shaktikanta Das has reiterated several times that deposits in private sector banks are safe and has also appealed to state governments not to withdraw their funds.

IndusInd Bank’s success in getting back deposits will result in the return of financial stability. A new leadership will make the journey easier for the lender. Also, how lenders navigate the virus impact will reveal the Indian financial system’s preparedness in dealing with crises.

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