Indian Bank — Cut PO, but risk-return positive, Maintain Buy :: BofA Merrill Lynch,

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Indian Bank — Cut PO, but risk-return positive,
Maintain Buy
Country Overview
1Q: Reported profit only 2% below, but PPOP miss by 15%
Indian Bank reported earnings of Rs4.1bn, 11% yoy growth and only 2% below
estimates, but PPOP earnings were 15% below estimates, driven by a 6% miss
on topline and +25% below estimates other income. Topline grew 14% yoy,
driven by ~21% yoy loan growth, but margins declined by ~30 bps yoy (+40bps
qoq) to 3.4%. CASA too declined by +200bps yoy, but was flattish qoq at 31%.
Other income missed by +25% and was down +34% yoy.
Asset quality remains manageable
Indian Bank’s headline gross NPLs are up 9% qoq (at 1%) and net up 6% (at
0.5%). Provision cover for the bank stands healthy at +84%, probably amongst
the highest across banks. Moreover, slippages have declined to Rs1.6bn vs.
~Rs2.5bn over last few quarters. We estimate slippages at Rs9.5bn (flat yoy).
Cut earnings by ~11/13%; growth at +16/21%
We have lowered our earnings est. by ~11/13% for FY12/13 to factor in added
margin pressure and cut loan growth est. owing to persistent macro headwinds.
We now estimate earnings growth of +16/21% for FY12/13.
Cut PO to Rs285, but risk-return still positive
We cut our PO to Rs285 factoring in earnings cut and macro headwinds. But we
maintain our Buy, as risk-return remains positive, with stock trading at +1.2-1.3x
FY12 book / 1.0x FY13 book, with RoEs of still +20/22%, resp. We believe Indian
Bk can trade up to +1.2-1.3x FY13 book owing to healthy return ratios (RoAs of
1.5% and RoEs of +20/22% for FY12/13. Our target multiple is still at a +15%
discount to Gordon multiples owing to low stock liquidity (Govt. owns 80% of
stock).