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INDIAN BANK
PRICE: RS.256
RECOMMENDATION: BUY
TARGET PRICE: RS.308
FY12E P/E: 6.2X,
P/ABV: 1.2X
Concerns are largely priced in; upgrade to BUY
Indian Bank has corrected sharply in last two months (~16%) led by worries
over margin pressure and asset class deterioration with the revelation of
'bribe-for-loan-scam' by CBI and rising concern over microfinance & telecom
exposure by Indian banking system. We believe, the correction in stock price
is overdone and hence we upgrade the stock to BUY from ACCUMULATE
earlier with ~23% upside from the current level.
We opine that margin has peaked (3.76% in Q2FY11) and is likely to decline
moderately in coming quarters. However, healthy CASA mix (~32%) of
Indian Bank is likely to provide cushion in the tight liquidity environment.
Loan book grew 28.0% CAGR during FY04-10; expect it to moderate to 20%
CAGR during FY10-12E as its loan growth would trail the deposit growth as
its C/D ratio is already hovering ~71% at the end of Q2FY11.
Asset quality has stabilized - during Q2FY11, gross NPA & net NPA stood at
1.29% & 0.73%, respectively. Provision coverage ratio (including technical
W/Os) is also healthy at 83.3% which provides cushion to its future earnings
despite of any unforeseen deterioration in its asset quality.
We have slightly tweaked our earning estimates for FY11E & FY12E and
upgrade the stock to BUY from ACCUMULATE earlier with a target price of
Rs.308 (Rs.315 earlier) on back of its recent price correction. At the target
price, stock is likely to trade at 1.5x of its FY12E adjusted book value.
Indian Bank has corrected sharply in last 2 months; we upgrade
the stock to BUY as correction is overdone in our view
Indian Bank has corrected sharply in last two months (~16%) led by worries over
margin pressure and asset class deterioration with the revelation of 'bribe-for-loanscam' by CBI and rising concern over microfinance & telecom exposure by Indian
banking system. We believe, the correction in stock price is overdone and hence we
upgrade the stock to BUY from ACCUMULATE earlier with ~23% upside from the
current level.
Margin has peaked; however, healthy CASA mix to support the
margins in rising rate environment
During Q2FY11, its NIM (3.76%) has improved both YoY & QoQ by 31 bps and 5
bps, respectively. We opine that its margin has peaked (3.7%-3.8% during last 4
quarters) and is likely to decline moderately in coming quarters.
We are modeling NIM to decline to 3.54% during FY11 as against 3.71% witnessed
during FY10 and this is further likely to decline to 3.44% during FY12.
However, we believe that healthy CASA mix (~32%) of Indian Bank is likely to provide cushion in the tight liquidity environment. Its CASA mix grew 27.5% during
Q2FY11 as compared to 20.1% growth in term deposits on back of 33.5% growth in
current account deposits and 25.9% growth in saving deposits accounts
Loan book grew 28.0% CAGR during FY04-10; expect it to moderate to 20% CAGR during FY10-12E
During Q2FY11, loan book witnessed strong growth of 29.8% (YoY) to Rs.699.7 bn
from Rs.539.2 at the end of Q2FY10. Large corporate, MSME and Agriculture grew
38.3%, 33.6% & 24.9%, respectively during Q2FY11. However, retail segment delivered moderate growth of 9.4% (YoY) during the same period.
Indian Bank has delivered strong loan book growth during FY04-10 (28.0% CAGR);
however, we expect it to moderate to 20% CAGR during FY10-12E as its loan
growth would trail the deposit growth as its C/D ratio is already hovering ~71% at
the end of Q2FY11.
Stable asset quality; heartening to watch this
Asset quality has stabilized - during Q2FY11, gross NPA & net NPA stood at 1.29%
& 0.73%, respectively. In absolute terms, although both gross NPA and net NPA increased sharply (YoY) - 88.3% and 418.8%, respectively, QoQ both improved by
8.5% and 1.1%, respectively.
Bank had witnessed sharp spike in NPA during Q1FY11, as it had migrated to NPA
recognition based on CBS platform. This helps the bank in tracking distress accounts
on day to day basis.
Provision coverage ratio (including technical W/Os) is also healthy at 83.3% which
provides cushion to its future earnings despite of any unforeseen deterioration in its
asset quality
Superior return ratios justifies its premium valuation
Indian Bank has delivered one of the highest return ratios in the industry (RoA:1.7%
& RoE: 23.7%) which justifies its premium valuation. We are modeling RoA to remain in the range of 1.3-1.4% and RoE in the range of 21.0-22.0% during FY11-12
for Indian Bank, better than its peers.
Valuations
At the current market price of Rs.256, the stock is trading at 6.2x its FY12E earnings
and 1.2x its FY12E ABV. We have slightly tweaked our earning estimates for FY11E
and FY12E and now expect net profit for FY11E and FY12E to be Rs.13.92 bn and
Rs.17.77.
This would result into an EPS of Rs.32.4 and Rs.41.3 for FY11E and FY12E, respectively. Adjusted book value for FY11E and FY12E is estimated to be Rs.164.5 and
Rs.205.4, respectively
We are upgrading the stock to BUY from ACCUMULATE earlier with price target of
Rs.308 (earlier Rs.315) based on 1.5x of its FY12E adjusted book value.
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