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Indian Bank (INBK)
Banks/Financial Institutions
Strong margins and lower pension provisions drive better earnings. Indian Bank’s
4QFY11 earnings of `4.4 bn, were sharply higher than our estimates on the back of
stable margins and lower provisions for employees. Retirement benefit charges, the key
overhang, were revised upwards but their impact on earnings was lower as the bank
released excess provisions made in earlier periods. Asset quality trends are stable.
Valuations are attractive at 1.1X FY2012 book and 6X EPS. BUY with a TP of `350.
Near-term concerns ease; maintain BUY
We maintain our BUY rating on Indian Bank with a target price of `350 rolling forward our
valuations to FY2013E. Near-term concerns have eased with the crystallization of liability for
retirement benefits, which had been the biggest overhang for the stock though its impact on
earnings has been lower than our estimates. On the business front, Indian Bank has slowed
growth, and focused on margins which we see it as positive. Stable NIM performance is impressive
but we expect compression going forward as the rise in deposit costs has been lower to peers,
especially given its relatively weaker liability franchise. We have maintained our earnings in
FY2012-13E. Indian Bank delivers the best RoAs of 1.4-1.5% and RoEs have been consistently
above 20%. Current valuations of 1.1XFY2012E PBR are very attractive. Retain BUY.
Pension liability crystallized, but lower provisions springs a surprise
As expected, Indian Bank revised their retirement benefits upwards for the quarter. The impact on
earnings was substantially lower, with a decline in staff costs qoq as the bank utilized excess
provisions to fund the current shortfall. The bank revised its pension costs to `9.6 bn (`8.1 bn for
existing employees and `1.5 bn for retired employees) as against a preliminary estimate of `2.9 bn
for pension and `1.6 bn for gratuity (same as before) reported in the previous quarter. The bank
released excess provision of `1.5 bn to meet the substantial rise in retirement costs. We await
management clarifications regarding any changes to the underlying assumptions for retirement
calculations. Cost-income ratio, consequent to lower staff costs, was at 35% for the quarter.
Loan growth slows down to industry average at 21%; CASA ratio declines 100 bps qoq to 31%
Indian Bank’s loans grew in line with the industry average at 21% yoy and 2% qoq, slowing down
the pace of growth from 30% yoy levels reported in the previous three quarters. The key growth
driver continues to be the corporate segment (grew 26% yoy) while retail loans showed improved
performance qoq (5% qoq and 10% yoy). Deposit growth matched loan growth at 20% yoy (5%
qoq) but CASA deposits grew slower at 16%. CASA ratio for the quarter has declined 100 bps
qoq to 31%. We expect Indian Bank to broadly grow in line with industry average at 18% CAGR
for FY2011-13E.
NIMs impressive led by slower cost of funds increase and better asset repricing
Indian Bank reported a net interest income (NII) of `11.1 bn (up 19% yoy, 7% ahead of our
estimates) driven by slower increase in cost of funds and better asset repricing. Lending
hikes taken since December 2010 has cushioned the impact on NIMs. NIMs was stable for
the quarter at 3.8% with lending yields improving by about 55 bps (KS calc) to 10.6% while
cost of funds increased by about 30 bps 5.7% (KS calc). CD ratio declined by 160 bps qoq
to 72%. The 40 bps increase (KS calc) in cost of funds comes as a positive surprise, as banks,
that have reported results thus far, have seen about 50-70 bps qoq. However, we expect
margins to come off from current levels over the next few quarters as funding costs
continues to increase coupled with liability franchise being relatively weak for the bank. We
are factoring a 30 bps yoy decline in NIMs in FY2012E.
Stable slippages at 1.5% levels; asset quality trends positive
Asset quality trends were positive for the quarter with normal slippages and gross and net
NPL’s lower than the previous quarter. Gross NPL declined 2% qoq to `7.4 bn (1% of loans)
while net NPL declined 7% qoq `3.9 bn (0.5% of loans). Slippages for the quarter were at
1.5%. Provision coverage ratio was about 47% (including write-off was flat qoq at 84%)
compared to 43% in December 2010. Loan loss provisions were higher at 100 bps
(annualized) as the bank used the excess profits to improve coverage ratio. Overall trends on
slippages appear healthy and we expect gross NPL ratio at 1.1% with slippages at 1.4%
levels and loan loss provisions at about 0.8% levels for FY2012.
Other operational highlights of the quarter
Non interest income declined by 7% yoy to `2.7 bn mainly due to higher treasury gains
(28% yoy) and weak fee income growth. Recoveries for the quarter were at `0.9 bn.
Treasury gains for the quarter were at `54 mn compared to `270 mn in 3QFY11.
Tier-1 capital stands comfortable at 11.0% with overall capital adequacy ratio at 13.6%.
The bank has indicated a need for fresh equity to fund near-term loan growth but given
the comfortable ratios reported for the quarter, we don’t see any near-term requirement
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Bank (INBK)
Banks/Financial Institutions
Strong margins and lower pension provisions drive better earnings. Indian Bank’s
4QFY11 earnings of `4.4 bn, were sharply higher than our estimates on the back of
stable margins and lower provisions for employees. Retirement benefit charges, the key
overhang, were revised upwards but their impact on earnings was lower as the bank
released excess provisions made in earlier periods. Asset quality trends are stable.
Valuations are attractive at 1.1X FY2012 book and 6X EPS. BUY with a TP of `350.
Near-term concerns ease; maintain BUY
We maintain our BUY rating on Indian Bank with a target price of `350 rolling forward our
valuations to FY2013E. Near-term concerns have eased with the crystallization of liability for
retirement benefits, which had been the biggest overhang for the stock though its impact on
earnings has been lower than our estimates. On the business front, Indian Bank has slowed
growth, and focused on margins which we see it as positive. Stable NIM performance is impressive
but we expect compression going forward as the rise in deposit costs has been lower to peers,
especially given its relatively weaker liability franchise. We have maintained our earnings in
FY2012-13E. Indian Bank delivers the best RoAs of 1.4-1.5% and RoEs have been consistently
above 20%. Current valuations of 1.1XFY2012E PBR are very attractive. Retain BUY.
Pension liability crystallized, but lower provisions springs a surprise
As expected, Indian Bank revised their retirement benefits upwards for the quarter. The impact on
earnings was substantially lower, with a decline in staff costs qoq as the bank utilized excess
provisions to fund the current shortfall. The bank revised its pension costs to `9.6 bn (`8.1 bn for
existing employees and `1.5 bn for retired employees) as against a preliminary estimate of `2.9 bn
for pension and `1.6 bn for gratuity (same as before) reported in the previous quarter. The bank
released excess provision of `1.5 bn to meet the substantial rise in retirement costs. We await
management clarifications regarding any changes to the underlying assumptions for retirement
calculations. Cost-income ratio, consequent to lower staff costs, was at 35% for the quarter.
Loan growth slows down to industry average at 21%; CASA ratio declines 100 bps qoq to 31%
Indian Bank’s loans grew in line with the industry average at 21% yoy and 2% qoq, slowing down
the pace of growth from 30% yoy levels reported in the previous three quarters. The key growth
driver continues to be the corporate segment (grew 26% yoy) while retail loans showed improved
performance qoq (5% qoq and 10% yoy). Deposit growth matched loan growth at 20% yoy (5%
qoq) but CASA deposits grew slower at 16%. CASA ratio for the quarter has declined 100 bps
qoq to 31%. We expect Indian Bank to broadly grow in line with industry average at 18% CAGR
for FY2011-13E.
NIMs impressive led by slower cost of funds increase and better asset repricing
Indian Bank reported a net interest income (NII) of `11.1 bn (up 19% yoy, 7% ahead of our
estimates) driven by slower increase in cost of funds and better asset repricing. Lending
hikes taken since December 2010 has cushioned the impact on NIMs. NIMs was stable for
the quarter at 3.8% with lending yields improving by about 55 bps (KS calc) to 10.6% while
cost of funds increased by about 30 bps 5.7% (KS calc). CD ratio declined by 160 bps qoq
to 72%. The 40 bps increase (KS calc) in cost of funds comes as a positive surprise, as banks,
that have reported results thus far, have seen about 50-70 bps qoq. However, we expect
margins to come off from current levels over the next few quarters as funding costs
continues to increase coupled with liability franchise being relatively weak for the bank. We
are factoring a 30 bps yoy decline in NIMs in FY2012E.
Stable slippages at 1.5% levels; asset quality trends positive
Asset quality trends were positive for the quarter with normal slippages and gross and net
NPL’s lower than the previous quarter. Gross NPL declined 2% qoq to `7.4 bn (1% of loans)
while net NPL declined 7% qoq `3.9 bn (0.5% of loans). Slippages for the quarter were at
1.5%. Provision coverage ratio was about 47% (including write-off was flat qoq at 84%)
compared to 43% in December 2010. Loan loss provisions were higher at 100 bps
(annualized) as the bank used the excess profits to improve coverage ratio. Overall trends on
slippages appear healthy and we expect gross NPL ratio at 1.1% with slippages at 1.4%
levels and loan loss provisions at about 0.8% levels for FY2012.
Other operational highlights of the quarter
Non interest income declined by 7% yoy to `2.7 bn mainly due to higher treasury gains
(28% yoy) and weak fee income growth. Recoveries for the quarter were at `0.9 bn.
Treasury gains for the quarter were at `54 mn compared to `270 mn in 3QFY11.
Tier-1 capital stands comfortable at 11.0% with overall capital adequacy ratio at 13.6%.
The bank has indicated a need for fresh equity to fund near-term loan growth but given
the comfortable ratios reported for the quarter, we don’t see any near-term requirement
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