Indian Bank

Investors can consider accumulating the stock of Indian Bank, as the bank is backed by good fundamentals, robust advances and operating profit growth. The stock trades at a modest valuation, of about one time its September 30 book value and 5.3 times its trailing 12-month earnings.

Indian Bank, a small-sized public sector bank with more than 40 per cent of its total branches in Tamil Nadu, trades at a premium to peers such as Corporation Bank, Vijaya Bank, Dena Bank and Andhra Bank. The valuations are justified because of the high-quality diversified loan book, 100 per cent CBS-enabled operations, superior profitability ratios, strong net interest margin (NIM) and significant headroom to raise capital in future.

Financials

Indian Bank’s balance-sheet has grown at a 17 per cent compounded annual growth rate while its advances grew at 26.5 per cent over the past five years. Indian Bank, which faced a major crisis in the mid-1990s, was turned around through a re-capitalisation done by the government through the issue of bonds; consequently, the bank had more of its deposits parked in investments.

But the successive managements’ attempts to improve the bank’s profitability without compromising on the quality of assets, have helped it perform better than most of its peers.

Indian Bank has posted strong operating profit growth of 44 per cent in the half year ended September 30, but has reported muted net profit growth of 9 per cent. Operating profit growth did not translate into higher net profits due to higher provisions and tax outgo.

The bank is expected to maintain its momentum, given the advances growth it had managed to clock in tough economic conditions.

In the September quarter, the bank’s advances growth, combined with higher NIM (net interest margins) boosted net interest income by 44 per cent year-on-year. The NIM improved from 3.23 per cent to 3.86 per cent, on the back of increased yield on advances and lower cost of funds. Increased yield on advances was on expected lines as the bank has increased its PLR during the September quarter.

The bank saw its interest income component decline from Rs 232 crore to Rs 212 crore in the September quarter, mainly due to a decline in profit on sale of investments (down from Rs 66 crore to Rs 3 crore).

Non-recurring items such as recovery of bad debts also formed a major component of ‘other income’. Operating expenses were flat, with the bank already putting in place investments in technology; the cost-income ratio moderated to 40 per cent from 54 per cent last year. The net profits may grow at a higher rate from here on as there will be bond provision write-backs. Higher treasury income and growth in ‘other income’ will contribute to the bank’s growth but the AS-15 retirement benefits for the next four years will weigh on earnings.
Loan book

Indian Bank’s loan book is focussed mainly on mid/large corporate (50 per cent), retail advances (18.5 per cent), SME advances (10.7 per cent) and agriculture advances (15 per cent).

The advances growth of the bank is contributed by the corporate credit (57 per cent) and SMEs (44 per cent). Retail credit, as a proportion of advances, has come down from 20 per cent to 18 per cent, Y-o-Y. That the incremental growth in advances was contributed by as many as 32 sectors, is a good sign and indicates a diversified loan book.

Deposit growth of 20 per cent was slower Y-o-Y, as the bank deliberately reduced bulk deposits during the first half of this fiscal, improving its CASA. The credit-deposit ratio rose substantially from 60 per cent to 73 per cent during the year.
Asset Quality

The bank’s net NPA/advances of 0.18 per cent places it among the best banks based on asset quality. The provision coverage, which is as high as 81 per cent, will cushion the bank from adverse impacts. The bank’s capital adequacy ratio stands at 11.2 per cent with tier-1 capital 10.1 per cent (which is at comfortable levels). The government’s stake of 80 per cent may help the bank raise capital, once market conditions turn more favourable.
Outlook

The bank’s performance till date is ahead of its FY-09 targets and the management is planning to go slow on advances from hereon, as a matter of caution. But with the expectation of interest rates coming down and with income from other avenues hard to come by, bank credit may be the key avenue to deliver reasonable growth.

The bank’s 100 per cent CBS will continue to help it contain operating costs and boost ‘other income’. Indian Bank’s ‘other income’ component at 28 per cent of the net revenue, is low and suggests scope for improvement.

The bank’s mark-to-market provision on its bond portfolio, taken in a rising interest rate environment, may be written back in coming quarters if interest rates fall, helping profits. Like other banks, Indian Bank too is a beneficiary of the farm debt waiver reimbursement and the CRR cut.

The recent RBI measures such as CRR cut of 350 basis points, repo rate cut of 150 basis points and SLR cut of 1 percentage point will help ease liquidity for the whole banking system. The bank will get around Rs 2,200 crore from the CRR cut. The transitional liability for AS-15 retirement provisions of Rs 92 crore every year for the next four years may, however, pressure profits.