Tough road ahead for IndusInd Bank’s new boss

IndusInd Bank chief Romesh Sobti may have felt a sense of deja vu when he retired on March 23. He was appointed as the bank’s managing director and chief executive officer 12 years ago in an eerily similar circumstance: The world was reeling under the global financial crisis and investors had written off IndusInd Bank. In this challenging backdrop, Sobti was tasked with transforming the Hinduja group-backed private lender.

Despite many odds, Sobti embraced the challenge and led a massive overhaul that changed the face of the bank. But, as Sobti finds, he leaves the bank at a precarious juncture. His successor, Sumant Kathpalia, will need to prove his mettle and bring the foundering bank back on track in a turbulent global environment.

Under Sobti’s leadership, IndusInd Bank entered the league of ‘champion’ banks. Bank analysts, who had earlier written obituaries for the bank stock, were now overweight on it. In fact, IndusInd Bank was among the few banks investors reposed confidence in during the peak of the crisis in the banking sector. The private lender held on as one of the best-performing banking stocks for close to a decade until 2018.

Sobti orchestrated a strategic approach to build the bank’s retail franchise and value for its stakeholders. The bank’s focus on retail, and particularly, SME (small and medium-sized enterprises) borrowers helped the bank dodge the bullet of risky corporate loans. The merger with Bharat Financial further paved the way for the bank to grow its MFI (microfinance institutions) portfolio. With Sobti at the helm of affairs, the bank managed to contain its non-performing assets for over a decade.

However, the debt crisis stoked by the collapse of Infrastructure Leasing & Financial Services marked a crucial point for the bank. The first signs of stress appeared and thereafter the asset quality has been under pressure. The steady decline in asset quality combined with a fragile domestic economy and the outbreak of the Coronavirus pandemic has got investors worried.

In the past few weeks, Sobti has tried to assuage investors’ concerns around the growth trajectory of the bank. A note from brokerage firm JPMorgan points out that IndusInd Bank has an exposure of over 9% towards the telecom and real estate sectors, which is a potential overhang on the stock. The declining state of economic affairs has raised questions on the quality of the bank’s microfinance book.

As a result, IndusInd Bank’s share price has nosedived close to 80% in the current calendar year. While Sobti’s successor Kathpalia is an insider who grasps the full scope of internal challenges the bank is currently facing, he has his task cut out. Foremost, is to reassure investors of the bank’s growth story and address concerns around asset quality and transparency of accounting norms. The focus on retail loans may not be the pill to cure all ills in times of unprecedented global uncertainty.