Buy Indian Bank – 3QFY2011 Result Update- Angel Broking

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    Indian Bank – 3QFY2011 Result Update

Angel Broking maintains a Buy on Indian Bank with a Target Price of Rs. 285.

For 3QFY2011, Indian Bank reported healthy net profit growth of 18.2% qoq to

`491cr, which was above our estimates of `436cr because of lower provisioning

expenses. Lower operating expenses and improving asset quality were the key

positives of the results. Hence, we maintain our Buy rating on the stock.

Strong advances growth with improvement in asset quality: The bank’s net

advances and deposits grew by 6.5% qoq (28.6% yoy) and 3.1% qoq (19.2%

yoy), respectively, during 3QFY2011. CASA deposits witnessed 22.7% yoy growth

(up 2.3% qoq). The CASA ratio declined to 32.0% in 3QFY2011 from 32.2% in

2QFY2011. The bank was able to improve its NIM by 8bp sequentially to 3.84%

due to improvement in yield on advances to 10.35%. Consequently, net interest

income (NII) grew by healthy 5.5% qoq and 18.9% yoy to `1,038cr, slightly above

our estimates. Gross NPAs in absolute terms fell by `152cr qoq. Slippages came

down further to `250cr from `330cr and `830cr in 2QFY2011 and 1QFY2011,

respectively. Slippage ratio improved to 1.6% from 2.1% in 2QFY2011.

Outlook and valuation: The bank’s relatively higher rural and semi-urban

presence has enabled it to maintain reasonable cost of funds, resulting in more

resilient NIMs than other mid-size PSU banks. Going forward, strong recoveries

and upgrades as well as declining slippages are likely to keep provisioning

expenses low. At the CMP, the stock is trading at 5.5x FY2012E EPS of `42.2 and

1.1x FY2012E ABV of `219.3, which is below our target multiple of 1.3x FY2012

ABV. Hence, we maintain our Buy rating on the stock with a Target Price of `285,

implying a 21.8% upside from current levels.

Strong advances growth continues

During the quarter, the bank’s advances grew by strong 28.6% yoy and healthy

6.5% qoq to `73,919cr compared to industry growth of ~9% qoq. Deposits during

the quarter grew by healthy 19.2% yoy and 3.1% qoq to `1,01,015cr compared to

industry growth of ~4.7%. Growth in advances was driven by the corporates (up

39.8% yoy), overseas credit (up 33.2% yoy) and SME (up 23.1% yoy) segments.

However, on a sequential basis, the SME segment was marginally down by 0.5%.

Even agricultural advances showed good traction, with 22.5% yoy growth.

The retail segment witnessed moderate growth of 7.2% yoy.

On the deposits side, growth was driven by CASA deposits (up 22.7% yoy), with

current account deposits growing by moderate 12.4% yoy and saving account

deposits rising by 25.4% yoy. However, during 3QFY2011, as current account

deposits declined by 6.6% qoq compared to the increase of 7.3% qoq in

2QFY2011, CASA ratio fell to 32.0% in 3QFY2011 from 32.2% in 2QFY2011.

On the back of improvement in yield on advances from 10.22% in 2QFY2011 to

10.35% in 3QFY2011, the bank was able to improve its NIM by 8bp sequentially

to 3.84%. Consequently, NII grew by 5.5% qoq and 18.9% yoy to `1,038cr.

For FY2011, management expects to sustain NIM at 3.6–3.7%.

Non-interest income declines

During the quarter, non-interest income declined by 12.3% qoq and 15.3% yoy

mainly on account lower treasury gains (down 65.1% yoy) and lower fee income

(down 10.9% yoy). Core non-interest income declined by 15.9% qoq (up

marginally 2.5% yoy) to `222cr in 3QFY2011. Recoveries were also lower by

45.6% yoy and 39.5% qoq to `23cr during the quarter. However, management

expects recoveries to pick up in 4QFY2011.

Asset quality improved considerably, slippages fall further

During 3QFY2011, slippages further came down to `250cr from `330cr in

2QFY2011 and `830cr in 1QFY2011. Annualised slippage ratio improved to

1.6% in 3QFY2011 from 2.1% in 2QFY2011. During the quarter, the bank’s gross

and net NPA ratios improved to 1.02% (1.29% in 2QFY2011) and 0.57% (0.73%

in 2QFY2011), respectively. Gross and net NPAs in absolute terms declined by

16.8% qoq and 17.5% qoq, respectively. The provision coverage ratio, including

technical write-offs, remained stable at 83.0%.

Operating costs decline sequentially

During the quarter, total operating costs declined by 10.1% qoq and marginally by

0.3% yoy to `475cr on account of a 9.9% qoq decrease in staff expenses and a

10.7% yoy decrease in other operating expenses. Due to healthy operating income

growth (10.3% yoy and 1.5% qoq), the bank’s cost-to-income ratio improved to

36.9% (from 40.8% in 3QFY2010 and 41.7% in 2QFY2011).

Management indicated that it has estimated the overall pension liability at `280cr,

which is to be amortised in five years. Accordingly, it provided an amount of

`14cr, the proportionate sum for the quarter, during 3QFY2011.

During 3QFY2011, the bank opened 19 branches and 21 ATMs, taking its total

branch network to 1,822 and ATM network to 1,085. Management indicated that

100 more branches will be opened by 4QFY2011.

Comfortable capital adequacy

The bank recorded a comfortable capital adequacy ratio (CAR) of 12.35%, with

Tier-I capital of 9.7% (forming healthy 78.5% of the total CAR). If the profit of

9MFY2011 is considered, then capital adequacy stands at 14.1%. Going forward,

we believe the bank has adequate headroom to raise additional Tier-II capital to

grow above the industry’s growth rate.

Investment arguments

Relatively high yield on advances, with resilient asset quality

A large part of the bank’s credit book comprises SME and mid-size corporates,

contributing to relatively high yield on advances but, at the same time, maintaining

superior asset quality with a net NPA ratio of less than 1%.

Technologically efficient branch franchise, moderate CASA

Indian Bank plans to open 190 branches during FY2011 (100 branches in

4QFY2011E), indicating 10% yoy growth, to take its total branch network to

~1,950 with 100% CBS. The bank has a moderate CASA of 32%, with CASA

reporting a 19.4% CAGR during FY2007–10 and growing by 22.7% yoy in

3QFY2011.

Outlook and valuation

Indian Bank’s performance and strategic direction have broadly been positive and

balanced since its listing, leading to a gradual improvement in the quality of

earnings vis-à-vis its peers. Additionally, the bank’s CMD has a five-year tenure,

which provides a reasonable strategic stability to the bank. Moreover, the bank’s

predominantly rural and semi-urban presence has enabled it to maintain

reasonable cost of funds, resulting in more resilient NIMs than other mid-size PSU

banks. Going forward, strong recoveries and upgrades as well as declining

slippages are likely to keep provisioning expenses low. At the CMP, the stock is

trading at 5.5x FY2012E EPS of `42.2 and 1.1x FY2012E ABV of `219.3, which is

below our target multiple of 1.3x FY2012 ABV. Hence, we maintain our Buy rating

on the stock with a Target Price of `285, implying a 21.8% upside from current

levels.