What made IndusInd bank a great franchise? Is that franchise lost?

IndusInd Bank has historically been admired in the banking industry for several reasons, making it one of the standout franchises in Indian banking. Here’s why it earned that reputation:

1. Strong Leadership & Execution:

• The bank was transformed under Romesh Sobti’s leadership (2008-2020), who built a high-growth, high-profitability banking model.
• Sobti and his team (ex-ABN AMRO executives) focused on risk-adjusted lending, superior underwriting, and niche market dominance.

2. High Return Ratios & Profitability:

• IndusInd consistently maintained a Return on Assets (ROA) of 1.8%-2% and Return on Equity (ROE) of 15%-18%, putting it in the premium banking league.
• Pre-COVID, its Net Interest Margins (NIMs) were strong (3.8%-4%), indicating high pricing power.

3. Robust Liability Franchise & CASA Growth:

• While it was once a weak deposit franchise, it significantly improved its CASA (Current Account, Savings Account) ratio, reducing funding costs over time.
• It successfully built strong customer relationships with affluent, SME, and corporate clients, improving its low-cost deposit base.

4. Diversified & Profitable Lending Mix:

• Unlike many private banks heavily reliant on corporate or retail loans, IndusInd had a well-diversified loan book:
  • Vehicle finance (CV, CE, cars, two-wheelers, tractors, etc.) – One of the largest players, commanding strong pricing power.
  • Microfinance (Bharat Financial acquisition) – Leading presence in rural credit.
  • Mid & large corporate lending – Well-structured, high-margin loans.
  • Retail lending expansion – Grew credit cards, personal loans, and affordable housing.

5. Strong Risk Management (Pre-2020):

• Before the COVID period, IndusInd had a reputation for conservative risk-taking, avoiding major infra/NBFC risks that troubled Yes Bank, RBL, and others.
• While some aggressive lending segments (microfinance, vehicle finance) carried inherent risks, the bank’s provisioning policies were seen as prudent.

6. Digital & Tech-Driven Approach:

• IndusInd was one of the early adopters of digital banking, fintech tie-ups, and AI-driven credit underwriting.
• It leveraged big data, AI, and machine learning to refine credit risk assessment, helping maintain superior asset quality.

7. Superior Cost Efficiency & Operating Leverage:

• IndusInd had one of the best Cost-to-Income ratios (~42-45%), reflecting its efficiency compared to PSU banks and even some private peers.
• It managed to scale the franchise while keeping costs under control, leading to high operating leverage.

8. Acquisitions That Strengthened Franchise:

• The Bharat Financial Inclusion (BFIL) merger gave it a leadership position in the microfinance space.
• Earlier, it had acquired Deutsche Bank’s credit card portfolio, helping it gain a foothold in the unsecured lending business.

What Changed? Why Did the Market Lose Faith?

While IndusInd built a strong franchise, some concerns emerged over time:

1. COVID-19 & Microfinance Stress – Its exposure to microfinance (BFIL) created asset quality concerns during lockdowns.
2. Aggressive Growth Perception – Some investors worried about aggressive lending to certain risky sectors, reminiscent of Yes Bank/RBL Bank.
3. Corporate Governance Issues – Allegations of evergreening microfinance loans in 2021 dented its credibility.
4. Derivative Exposure Concerns (2024) – The recent issue around derivative contracts created fresh panic in the market.

Is the franchise lost?

The IndusInd Bank franchise is not lost, but its perception has been damaged, leading to valuation derating. However, the bank still retains its core strengths, and if execution improves, it can regain industry admiration.

Here’s a balanced view on whether the franchise is lost or just going through a rough phase:

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What Has Been Lost?

🔻 Premium Valuation & Market Confidence

• Earlier, IndusInd traded at 3-5x P/B (Price-to-Book); now it’s barely around 1x P/B due to concerns over corporate governance, aggressive lending, and recent derivative losses.
• Institutional investors, who once saw it as a best-in-class private bank, have turned cautious.

🔻 Perceived Risk-Adjusted Lending Model

• Earlier, the bank was seen as a well-managed, high-growth yet prudent lender.
• The microfinance stress (2021-2022), derivative concerns (2024), and previous evergreening allegations dented this perception.

🔻 Leadership Reputation Hit

• Under Romesh Sobti (2008-2020), the bank was admired for stable execution, risk control, and high profitability.
• Post Sobti, the bank lost its premium execution aura, as concerns over risk management and governance crept in.

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What Is Still Intact?

✅ Core Banking Franchise & Competitive Position

• Still has industry-leading margins (4.2-4.3% NIMs) and strong business segments (vehicle finance, microfinance, corporate banking).
• CASA ratio has improved (~42%), and deposit growth remains solid.

✅ Earnings Power & Profitability

• ROA of 1.8-2% is still achievable, which means the bank remains fundamentally strong.
• Even in the worst periods, the bank has been able to generate ~₹8,000-₹10,000 crore annual profit.

✅ Balance Sheet Strength

• Capital adequacy is at 16-17%, which means it is well-capitalized and not in distress.
• PCR (Provision Coverage Ratio) remains high, indicating buffer against NPAs.

✅ Institutional Comeback Possible

• The F&O ban has kept institutions away, but once clarity emerges, they may return.
• Large investors love high ROA, high NIM franchises, and if IndusInd executes well, a re-rating can happen.

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So, Is the Franchise Lost?

🚫 Not permanently. IndusInd still has the DNA of a strong, high-margin bank.
💡 But the perception has taken a hit, and the bank needs to rebuild trust through better governance, stable earnings, and execution discipline.

If the bank delivers strong execution over the next 2-3 years, the franchise can regain its lost glory, much like ICICI Bank did post-2018 or Axis Bank post-2020.

Conclusion: Why the Franchise is Still Strong

Despite these setbacks, IndusInd still retains key strengths:

• Strong capital adequacy (~16-17%)
• Stable deposit franchise with improving CASA ratio (~42%)
• Industry-leading NIMs (~4.3%)
• Consistently high profitability (~₹8,000-₹10,000 crore PAT expected in FY25-FY26)
• ROA expansion back to 1.8-2% trajectory as per management guidance

If IndusInd successfully navigates the current uncertainty and improves its governance perception, it has the potential to reclaim its premium valuation and industry admiration.

Key Markers to Track Over 2 Years:

1. Microfinance Stability – If rural stress eases and BFIL delivers solid disbursement growth without NPA spikes, the market will re-rate it.

2. Liability Franchise Growth – Watch CASA ratio and deposit growth. If IndusInd strengthens its deposit base, cost of funds will come down, improving NIMs.

3. Derivative Clarity – If no further shocks come from the derivatives book and risk stabilizes, fear will subside.

4. Leadership Transition – If a new CEO comes in with a solid reputation and continuity in strategy, the market will appreciate that.

5. Market Narrative Shift – Once people stop comparing it with RBL/Yes Bank and start discussing its earnings power, a re-rating will be imminent.