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Best in class NIMs coupled with sound asset quality led to superior ROAs
Indian Bank’s loan book is skewed towards high yielding segments such as SME, retail and agriculture, which form about 43% of the banks advances. As a result, despite having a moderate CASA ratio of 32%, the bank’s NIMs are the highest amongst its peer set at around 3.7% as compared to ~3.1% for its peers. Best in class NIMs coupled with sound asset quality and cost efficiencies has led to superior ROAs for the bank. Indian Bank’s ROA at 1.7% for FY10 is one of the highest in the industry.
Loan book to grow at CAGR of 20% for FY11-13
Indian Bank has displayed a robust loan book growth in the past, with advances expanding by a CAGR of 27.6% from FY05 to FY10 as compared to a systemic CAGR of 24.6% for the same period. Going ahead we expect loan growth to moderate from current levels based on a slowdown in general bank lending to infrastructure, telecom, and microfinance sectors. Despite moderation, the advance book expansion is expected to remain strong, at around 20% CAGR for FY11-13.
Adequately capitalized to fund growth
The bank is adequately capitalized with a CRAR of 12.4% and a Tier 1 CAR of 9.7%. The bank has further headroom to raise ` 50720 mn of Tier II capital to fund future growth.
Asset quality concerns overdone
Despite its focus on riskier, high yielding assets, the bank’s asset quality is sound. This can be attributed to its strong relationships with its clients as well as its prudent attitude towards asset quality. With the shift towards system based recognition of NPAs, the asset quality of Indian Bank witnessed a setback with slippages spiking to 5.1% in Q1FY11. In the last two quarters, however slippages have moderated and stood at 1.4% for Q3FY11. Going ahead we expect asset quality to improve on the back of system recognition of NPAs which would lead to better monitoring and control.
Outlook &Valuation
Given Indian Banks superior ROAs, best in class NIMs, sound asset quality and strong loan book growth, we believe it should trade at a premium to its peer group. At a CMP of ` 213, the bank is available at compelling valuations, marginally below its long term average one year forward P/ABV multiple (rolling basis) of 1.1x and at a 55% discount to its historical high valuation. We initiate coverage on Indian Bank with a BUY rating and a price target of ` 310 (1.4x FY12E ABV).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Best in class NIMs coupled with sound asset quality led to superior ROAs
Indian Bank’s loan book is skewed towards high yielding segments such as SME, retail and agriculture, which form about 43% of the banks advances. As a result, despite having a moderate CASA ratio of 32%, the bank’s NIMs are the highest amongst its peer set at around 3.7% as compared to ~3.1% for its peers. Best in class NIMs coupled with sound asset quality and cost efficiencies has led to superior ROAs for the bank. Indian Bank’s ROA at 1.7% for FY10 is one of the highest in the industry.
Loan book to grow at CAGR of 20% for FY11-13
Indian Bank has displayed a robust loan book growth in the past, with advances expanding by a CAGR of 27.6% from FY05 to FY10 as compared to a systemic CAGR of 24.6% for the same period. Going ahead we expect loan growth to moderate from current levels based on a slowdown in general bank lending to infrastructure, telecom, and microfinance sectors. Despite moderation, the advance book expansion is expected to remain strong, at around 20% CAGR for FY11-13.
Adequately capitalized to fund growth
The bank is adequately capitalized with a CRAR of 12.4% and a Tier 1 CAR of 9.7%. The bank has further headroom to raise ` 50720 mn of Tier II capital to fund future growth.
Asset quality concerns overdone
Despite its focus on riskier, high yielding assets, the bank’s asset quality is sound. This can be attributed to its strong relationships with its clients as well as its prudent attitude towards asset quality. With the shift towards system based recognition of NPAs, the asset quality of Indian Bank witnessed a setback with slippages spiking to 5.1% in Q1FY11. In the last two quarters, however slippages have moderated and stood at 1.4% for Q3FY11. Going ahead we expect asset quality to improve on the back of system recognition of NPAs which would lead to better monitoring and control.
Outlook &Valuation
Given Indian Banks superior ROAs, best in class NIMs, sound asset quality and strong loan book growth, we believe it should trade at a premium to its peer group. At a CMP of ` 213, the bank is available at compelling valuations, marginally below its long term average one year forward P/ABV multiple (rolling basis) of 1.1x and at a 55% discount to its historical high valuation. We initiate coverage on Indian Bank with a BUY rating and a price target of ` 310 (1.4x FY12E ABV).
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