>INDIAN BANK (KOTAK SECURITIES)

Asset quality concerns abate; strong re-rating candidate; BUY. We expect Indian Bank to get re-rated as key concerns regarding its asset quality have abated significantly. The quarter saw a sharp decline in restructured loans (down 30% qoq). The new management is confident of asset quality and is targeting nil net NPLs by March 2011. Core earnings remained strong with PAT at Rs4.1 bn (up 4% yoy), supported by strong growth in NII (up 40% yoy). The stock trades at 1XFY2011E PBR, despite near 20% RoE. Reiterate Buy with TP of Rs280 (45% upside).

Strong core operating performance; margins stable at 3.7%

Indian Bank reported net interest income (NII) of Rs9.3 bn (up 40% yoy). The company’s net

interest margin (NIM) was at 3.7% for FY2010 supported by a reduction in cost of deposits:

(1) CASA deposit ratio as of March 2010 was 32%, which was a marginal improvement compared to December 2009, (2) falling cost of overall deposits which more than offset the decline in lending yields of 50 bps (as per our estimates) during the quarter (3) improvement in CD ratio by 300 bps to 71%. We are building more conservative estimates into our margins (30 bps decline by FY2012).

Restructured assets decline >30% qoq

Indian Bank’s restructured assets, one of the highest in the industry, declined 32% qoq to Rs34.5

bn driven by upgradation (having completed one year of satisfactory servicing). The slippage from these loans has been marginal at less than 1% of loans while incremental restructuring was at Rs2.1 bn (35 bps of loans). Priority sector lending, textiles, commercial real estate, and SME were the main sectors which saw upgradation during the quarter. We note that a lot of concerns

emanating from its restructured pool have receded significantly and this should lead to a re-rating of the stock.

Net NPAs increased from a low base; provision coverage (excluding write off) healthy at 72%. Gross NPA for the quarter was flat qoq at Rs5.1 bn (0.8% of loans) while net NPA increased

marginally bank as the bank wrote off loans during the quarter. Consequently, provision coverage declined to 72% from 83% in the previous quarter (including written off is at 94%). The bank changed its provision policy during the quarter to a more conservative practice, providing 100% for all loans that are below substandard. Hence, loan loss provisions for the quarter were higher at Rs2 bn. Further, the bank has also made a floating provision of nearly Rs1 bn. We currently model a delinquency ratio of 1.5% in FY2011E (about 1% in FY2010) and 1.0% in FY2012E to factor the credit risk that the company may be exposed to.

To read the full report: INDIAN BANK