Before 2018, IndusInd Bank consistently traded at a premium valuation compared to most other banking stocks in India. Here’s why investors assigned a higher Price-to-Book (P/B) and Price-to-Earnings (P/E) multiple to the bank:
1. Strong Loan Growth & Superior Profitability
- Loan book growth: IndusInd Bank delivered industry-leading loan growth (~25-30% CAGR) in the years leading up to 2018, much faster than peers like ICICI Bank and Axis Bank.
- Higher ROE & ROA:
- Return on Equity (ROE): Consistently around 15-18%, significantly higher than many PSU and even some private banks.
- Return on Assets (ROA): Above 1.5%, a benchmark of high profitability in banking.
2. Strong Asset Quality & Low NPAs (Pre-2018)
- IndusInd Bank had one of the lowest Gross NPA (Non-Performing Asset) ratios (~1% before 2018), much better than banks like ICICI, Axis, and Yes Bank, which were struggling with high NPAs.
- Minimal exposure to stressed corporate loans, unlike PSU banks that were burdened with bad infrastructure loans.
3. Well-Managed Liability Franchise
- CASA Ratio Growth: IndusInd steadily improved its Current Account Savings Account (CASA) ratio, which led to lower funding costs.
- Diversified Deposits: Unlike some corporate-heavy banks, IndusInd had a strong retail and SME deposit base, making it more stable.
4. Consistent Earnings Growth & Operating Leverage
- Net Interest Margin (NIM): IndusInd consistently reported high NIMs (~3.5%-4%), thanks to a well-managed loan book and a focus on high-yield retail segments.
- Earnings Growth: Profits grew at a CAGR of ~25-30% for several years, far outpacing most banks.
5. Professional Management & Aggressive Expansion
- Under CEO Romesh Sobti (2008-2020), IndusInd Bank transformed from a small mid-tier bank into a major private sector player.
- Strong execution and a focus on profitable retail banking & vehicle finance attracted institutional investors.
6. Market Confidence & Premium Valuation
- Investors were willing to pay a premium because IndusInd was seen as a high-growth, well-managed, low-NPA bank.
- It traded at a P/B ratio of ~4-5x (vs. ~1-2x for PSU banks and ~2-3x for private peers like ICICI).
- FIIs & mutual funds consistently increased their stake, seeing it as a compounder stock.
Why Did This Premium Disappear After 2018?
After 2018, several issues led to valuation compression:
- Exposure to IL&FS crisis led to doubts about asset quality.
- Slowdown in loan growth compared to earlier years.
- Rising NPAs in corporate lending.
- COVID-19 impact hit its lending book, especially in vehicle finance.
Conclusion
Before 2018, IndusInd Bank’s high growth, strong profitability, low NPAs, and aggressive expansion made it a premium banking stock. However, concerns about corporate loan exposure and asset quality post-2018 led to a de-rating in valuations.
Extent of IndusInd Bank’s Exposure to IL&FS:
- Total exposure: ₹3,000 crore (~$400 million)
- Breakdown:
- Around ₹2,000 crore was in operating IL&FS subsidiaries, which were still generating cash flows.
- ₹1,000 crore was exposed to IL&FS group entities that faced stress.
- Impact on financials:
- The bank initially downplayed concerns, stating that much of the exposure was to "standard assets."
- However, after IL&FS defaulted, provisions had to be increased, impacting profitability.
- This led to a sharp drop in stock price and valuation de-rating as investors grew concerned about corporate lending risks.
Market Reaction & Valuation Impact
- IndusInd Bank’s stock, which was previously trading at a high P/B of ~4-5x, collapsed by ~30-40% as fears around bad loans increased.
- This also raised concerns about other corporate loan exposures in its books.
Comparing IndusInd with Other Banks’ IL&FS Exposure
| Bank | IL&FS Exposure (₹ Crore) | % of Loan Book | Impact |
|---|---|---|---|
| SBI | ₹1,000 – ₹1,200 | ~0.1% | Limited due to size |
| HDFC Bank | ₹1,000 | ~0.1% | Minimal impact |
| ICICI Bank | ₹2,200 | ~0.3% | Managed via provisions |
| Axis Bank | ₹800 | ~0.2% | Limited impact |
| Kotak Mahindra Bank | ₹500 | ~0.2% | Minimal impact |
| YES Bank | ₹2,500 – ₹3,000 | ~2% | Stock fell sharply |
| IndusInd Bank | ₹3,000 | ~1.9% | Significant stock correction |
| Punjab National Bank (PNB) | ₹1,500 – ₹1,800 | ~0.3% | Limited impact |
| Bank of Baroda | ₹1,800 | ~0.4% | Moderately impacted |
Key Takeaways
- IndusInd Bank’s exposure was among the highest relative to its loan book (~1.9%).
- It was comparable to YES Bank, which also had around ₹3,000 crore exposure.
- Larger banks like SBI, HDFC Bank, and ICICI Bank had exposure but were better able to absorb the impact.
- Public sector banks (PNB, BoB) had exposure but faced smaller relative risks.
Conclusion
IndusInd Bank was one of the worst affected private banks due to its high relative exposure to IL&FS. This contributed to its valuation de-rating after 2018.
IndusInd Bank’s corporate governance history has been a mixed bag—strong professional management in earlier years but several concerns in recent times. Here's a breakdown:
1. Strong Governance Under Romesh Sobti (2008-2020)
- Romesh Sobti, who led the bank for over a decade, was widely respected for professional management and strong financial discipline.
- The bank maintained low NPAs and strong profitability during his tenure.
- Investors and analysts viewed IndusInd as a well-run, high-growth bank with robust governance.
2. Post-2020 Governance Concerns & Controversies
(i) IL&FS Exposure & Transparency Issues (2018)
- IndusInd initially downplayed its ₹3,000 crore exposure to IL&FS, saying it was “standard” (performing loans).
- Later, provisioning had to be increased as defaults emerged, raising questions about transparency.
- Investors felt the bank wasn’t upfront about the risks in its corporate book.
(ii) Evergreening of Loans Scandal (2021)
- Reports surfaced that IndusInd “evergreened” loans—giving fresh loans to struggling borrowers to avoid classifying them as NPAs.
- A whistleblower alleged that loans were rolled over without proper due diligence in its microfinance portfolio.
- The RBI stepped in, and the bank later admitted to “technical lapses” in loan disbursements.
(iii) CEO Reappointment Controversy (2024)
- The RBI restricted Sumant Kathpalia’s tenure as CEO to only one year instead of three, signaling governance concerns.
- This was seen as a rare regulatory intervention against a private bank’s leadership.
- Around the same time, the bank’s CFO also resigned abruptly, raising further red flags.
(iv) Derivatives Accounting Issue (2025)
- In March 2025, IndusInd reported a derivatives trading discrepancy of ~$175 million.
- The issue arose from accounting errors in its internal trading desk, affecting earnings.
- This led to a sharp stock price drop and increased scrutiny from regulators.
3. Market & Regulatory Perception
- In earlier years, IndusInd had a strong governance reputation, driven by professional leadership.
- Post-2018, governance issues, loan evergreening allegations, and regulatory scrutiny have raised concerns.
- The RBI’s interventions suggest heightened regulatory oversight compared to peers like HDFC Bank and ICICI Bank.
4. Comparison with Peers
| Bank | Governance Issues? | Key Concerns |
|---|---|---|
| HDFC Bank | Minimal | IT outages but strong governance overall |
| ICICI Bank | Past Issues (2018) | Chanda Kochhar conflict-of-interest case |
| Axis Bank | Moderate | Asset quality concerns in past |
| Kotak Bank | Minimal | RBI intervention on promoter shareholding |
| YES Bank | Severe | Large NPAs, governance failure |
| IndusInd Bank | Rising Concerns | Evergreening, CEO tenure cut, derivatives issue |
Final Verdict: Governance at IndusInd Bank
- Historically strong (pre-2018) but deteriorating post-2018.
- Not as bad as YES Bank but not as clean as HDFC or Kotak.
- RBI’s intervention (CEO tenure cut, regulatory scrutiny) signals rising concerns.
- Stock valuation has de-rated as investors factor in governance risks.
IndusInd Bank has had exposure to several stressed companies over the years. Notable exposures include:
-
Vodafone Idea: The bank had an exposure of approximately ₹30 billion to Vodafone Idea, a telecom company facing significant financial challenges.
Dewan Housing Finance Corporation Limited (DHFL): IndusInd Bank's exposure to DHFL was part of a broader set of loans to stressed entities, including the Zee and Reliance groups, totaling approximately ₹21 billion, representing about 1.1% of the bank’s loan book of ₹1,971 billion.
IL&FS (Infrastructure Leasing & Financial Services): The bank had significant exposure to IL&FS, which defaulted on its debt in 2018, triggering panic in India’s financial sector.
The resolution of Dewan Housing Finance Corporation Limited (DHFL) led to varying recovery amounts for different banks, based on their respective exposures and the terms of the resolution plan. Here's a breakdown of the recoveries for some major banks:
| Bank | Exposure (₹ crore) | Recovery (₹ crore) | Recovery Rate (%) |
|---|---|---|---|
| State Bank of India | 7,267 | ~3,125 | ~43 |
| Bank of India | 4,125 | ~1,773 | ~43 |
| Union Bank of India | 3,605 | ~1,550 | ~43 |
Note: The recovery amounts are approximate and based on the overall recovery rate of ~43% from the resolution plan.
The total recovery for financial creditors was approximately ₹37,400 crore, which equated to about 43% of the total admitted claims. This recovery was structured as approximately 20% in cash and 23% through non-convertible debentures (NCDs) issued by the acquiring entity.
Individual recovery amounts for other banks, including IndusInd Bank, were not publicly disclosed. However, applying the average recovery rate of 43% provides a general estimate of the amounts recovered relative to their exposures. Hence they might have recovered 1000 crores from the total exposure of 2500 crores to DHFL.
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