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Indian Bank (INBK)
Banks/Financial Institutions
Margins stable; NPL decline on sell down and lower slippages. 3QFY11 numbers
were higher than our estimates on the back of lower operating expenses and
provisions. Margins were stable for the quarter at 3.8%. The decline in gross NPL was
driven by a loan sell-down to ARCIL and lower slippages. The lower cost for retirement
benefits comes as a surprise but we expect a revision in 4QFY11. Valuations are
attractive at 1.1X FY2012 PBR and 5X PER. Maintain ADD with a target price of `320.
Concerns remain; maintain ADD
We maintain our ADD rating on the stock despite reasonable upside as we are not yet comfortable
with the pension liability reported during the quarter. The reported estimate of `2.8 bn is
substantially lower than that of other banks that have reported results in recent weeks. We have
seen Indian Bank revisiting its reported numbers and we believe that risks exist in the reported
pension cost estimates. We have assumed staff costs to grow by 27% growth in FY2011 and 10%
in FY2012. We have revised our earnings by 3-5% in FY2012-13 factoring lower margins and
reduced loan growth. On the back of revised earnings and factoring a higher cost of equity, we
have revised our TP to `320 (from `350 earlier). We maintain our ADD rating.
NPLs decline driven by sell-down and lower slippages
Indian Bank reported a sharp decline in non performing loans driven by a loan sell-down to ARCIL
and lower slippages. Gross NPL and net NPL declined 17% qoq to `7.5 bn (1% of loans) and `4.2
bn (0.6% of loans), respectively. The bank sold `4.3 bn of non performing loans (below `1 mn) to
ARCIL during the quarter at a profit of `460 mn (yet to be recognized in earnings). Most of these
loans slipped early in the year. Slippages for the quarter declined further from 2Q levels to 1.4%
(annualized). The provision coverage ratio was flat qoq at 44% (including write-off, it was flat qoq
at 83%) while loan loss provisions declined sharply to 16 bps (60 bps in September 2010). Overall
trends on slippages appear healthy and we expect the gross NPL ratio at 1.2% with slippages at
1.3% levels and loan loss provisions at about 0.7% levels in FY2011-12.
Loan growth at 29% yoy driven by large corporates; CASA ratio stable at 32%
Indian Bank’s loans grew 29% yoy and 6% qoq as of December 2010. Growth has shifted from
the SME segment to the large corporate segment (40% yoy growth), mainly driven by
infrastructure. For the quarter, nearly 75% of incremental loans were disbursed to large
corporates. Retail loans grew by 7% while agriculture loans grew by 23% yoy. Exposure to
microfinance was at `790 mn (less than 0.2% of loans). Deposit growth was relatively slow at
19% yoy (3% qoq) while CASA deposits grew marginally higher at 22%. CASA ratio for the
quarter was stable at 32%.
Marginal expansion of 8 bps in NIMs to 3.8%
Indian Bank reported net interest income (NII) of `10.4 bn (up 19% yoy). Net interest margin
was stable for the quarter at 3.8% (marginal improvement of 8 bps sequentially) mainly due
to the improvement in lending yields of 13 bps to 10.4%, stable cost of funds at 5.4% and
improvement of 230 bps on the CD ratio. We remain positive on the margin outlook,
however, we have maintained our NIM assumptions for FY2011 (20 bps decline in 4Q) while
factoring a decline of 25 bps in FY2012 as the recent increase in deposit rates are yet to be
reflected in earnings.
Other operational highlights of the quarter
Non interest income declined by 15% yoy to `2.5 bn mainly due to higher treasury gains
(95% yoy) and weak fee income growth. Core fee income growth was at 15% yoy at
`1.99 bn. Recoveries for the quarter was at `230 mn. Treasury gains for the quarter were
at `270 mn compared to `773 mn in 3QFY10.
Cost-income ratio was comfortable at 37% for the quarter. The bank has ascertained a
liability of `2.8 bn (about 3% of networth) as the cost of second pension. We find this
estimate substantially lower than other banks that have finalized these numbers. The
management indicated that the low charge is mainly on account of lower number of
employees opting under this plan. We believe this estimate is low and bound for a
revision in 4QFY11.
Tier-1 capital stands comfortable at 9.7% (excluding profits for 9MFY12) with overall
capital adequacy ratio at 12.4%.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Bank (INBK)
Banks/Financial Institutions
Margins stable; NPL decline on sell down and lower slippages. 3QFY11 numbers
were higher than our estimates on the back of lower operating expenses and
provisions. Margins were stable for the quarter at 3.8%. The decline in gross NPL was
driven by a loan sell-down to ARCIL and lower slippages. The lower cost for retirement
benefits comes as a surprise but we expect a revision in 4QFY11. Valuations are
attractive at 1.1X FY2012 PBR and 5X PER. Maintain ADD with a target price of `320.
Concerns remain; maintain ADD
We maintain our ADD rating on the stock despite reasonable upside as we are not yet comfortable
with the pension liability reported during the quarter. The reported estimate of `2.8 bn is
substantially lower than that of other banks that have reported results in recent weeks. We have
seen Indian Bank revisiting its reported numbers and we believe that risks exist in the reported
pension cost estimates. We have assumed staff costs to grow by 27% growth in FY2011 and 10%
in FY2012. We have revised our earnings by 3-5% in FY2012-13 factoring lower margins and
reduced loan growth. On the back of revised earnings and factoring a higher cost of equity, we
have revised our TP to `320 (from `350 earlier). We maintain our ADD rating.
NPLs decline driven by sell-down and lower slippages
Indian Bank reported a sharp decline in non performing loans driven by a loan sell-down to ARCIL
and lower slippages. Gross NPL and net NPL declined 17% qoq to `7.5 bn (1% of loans) and `4.2
bn (0.6% of loans), respectively. The bank sold `4.3 bn of non performing loans (below `1 mn) to
ARCIL during the quarter at a profit of `460 mn (yet to be recognized in earnings). Most of these
loans slipped early in the year. Slippages for the quarter declined further from 2Q levels to 1.4%
(annualized). The provision coverage ratio was flat qoq at 44% (including write-off, it was flat qoq
at 83%) while loan loss provisions declined sharply to 16 bps (60 bps in September 2010). Overall
trends on slippages appear healthy and we expect the gross NPL ratio at 1.2% with slippages at
1.3% levels and loan loss provisions at about 0.7% levels in FY2011-12.
Loan growth at 29% yoy driven by large corporates; CASA ratio stable at 32%
Indian Bank’s loans grew 29% yoy and 6% qoq as of December 2010. Growth has shifted from
the SME segment to the large corporate segment (40% yoy growth), mainly driven by
infrastructure. For the quarter, nearly 75% of incremental loans were disbursed to large
corporates. Retail loans grew by 7% while agriculture loans grew by 23% yoy. Exposure to
microfinance was at `790 mn (less than 0.2% of loans). Deposit growth was relatively slow at
19% yoy (3% qoq) while CASA deposits grew marginally higher at 22%. CASA ratio for the
quarter was stable at 32%.
Marginal expansion of 8 bps in NIMs to 3.8%
Indian Bank reported net interest income (NII) of `10.4 bn (up 19% yoy). Net interest margin
was stable for the quarter at 3.8% (marginal improvement of 8 bps sequentially) mainly due
to the improvement in lending yields of 13 bps to 10.4%, stable cost of funds at 5.4% and
improvement of 230 bps on the CD ratio. We remain positive on the margin outlook,
however, we have maintained our NIM assumptions for FY2011 (20 bps decline in 4Q) while
factoring a decline of 25 bps in FY2012 as the recent increase in deposit rates are yet to be
reflected in earnings.
Other operational highlights of the quarter
Non interest income declined by 15% yoy to `2.5 bn mainly due to higher treasury gains
(95% yoy) and weak fee income growth. Core fee income growth was at 15% yoy at
`1.99 bn. Recoveries for the quarter was at `230 mn. Treasury gains for the quarter were
at `270 mn compared to `773 mn in 3QFY10.
Cost-income ratio was comfortable at 37% for the quarter. The bank has ascertained a
liability of `2.8 bn (about 3% of networth) as the cost of second pension. We find this
estimate substantially lower than other banks that have finalized these numbers. The
management indicated that the low charge is mainly on account of lower number of
employees opting under this plan. We believe this estimate is low and bound for a
revision in 4QFY11.
Tier-1 capital stands comfortable at 9.7% (excluding profits for 9MFY12) with overall
capital adequacy ratio at 12.4%.
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