>INDIAN BANK features among the midsized banks in the public sector space

Background: Indian Bank features among the midsized banks in the public sector space. Through the years FY96 to FY01, the bank experienced a series of financial setbacks. Under a capital restructuring plan carried out in FY06 the bank had written off its accumulated losses. The bank operates a network of about 1970 offices in India. As of December 31, 2011 the bank had business of about Rs 2064bn. The bank’s footprint is largely skewed towards the southern states of Tamil Nadu, Karnataka, Andhra Pradesh and Kerala.



Tax reversal comes to the rescue
Indian Bank’s revenues and operating profit were along expected lines. PAT, however, was higher than expected; led by tax reversal. PAT was up 7%YoY at Rs 5.26bn. Net interest income continued to drive operating profits; non-interest income also chipped in with a 13.1%YoY growth.


Quarterly Highlights
• Credit growth stumbles, alternate credit (investments) up ~50%
• CASA stable at about 25%
• Asset quality healthy, net NPLs at 0.8%
• Margins under pressure
• Net interest income up 12.8%YoY
• Operating profits growth curbed at 12.3%YoY


Valuation
At current levels the stock trades at 0.97X FY13E adjusted book value (standalone) and 4.08X FY13E EPS (standalone). Buoyed by superior net interest margins and aided by a higher leverage on equity, Indian Bank enjoys a laudable return on equity in the PSU space. We expect the bank to be among the outperformers in the PSU banking space. With valuation having run up we rate the stock a MARKETPERFORMER on the stock with a target price of Rs 256. Key risks include a less than expected loan book expansion and a significant variation in spreads.



Credit growth tempered
Indian Bank continued to grow its balance sheet front in healthy double-digits; however, a downtick was seen with an 18.7%YoY growth at Rs 1,388.49bn. The bank outperformed the industry by reporting an 18.7%YoY growth in the loan book vis-à-vis the system growth of 15.9%. However, moderation was witnessed with a 1.8%QoQ growth as against 6%QoQ growth in the December 2010 quarter. Loan book was reported at Rs 873.37bn. Deposit growth also better at 17.8%YoY as against the industry growth of 16.9%. Deposits were reported at Rs 118.97bn. The credit-deposit ratio was reported at 73.4%. Indian Bank has retained the CASA ratio (24.8%) well compared to its peers; higher composition of savings deposits made for the slip in current account deposits. On the lines of industry leaders, Indian Bank expanded its investment book at a faster pace (19.1%YoY) as compared to the loan book. The investment book was reported at Rs 349.25bn.


Pressure on margins
In tune with that of the industry yields and costs were higher; the bank appears to have absorbed a portion of the higher cost of funds contributing to a downtick in margins. An uptick in borrowings and lower yielding investments contributed to pressure on margins. Net interest margins were reported at 3.58% as against 3.84% in the December 2010 quarter. Led by an 18.7%YoY growth in balance sheet net interest income was 12.8%YoY. Cost of deposits was reported at 6.9% vs 5.4% in the December2010.



Growth in operating profits curbed
Indian Bank reported a 13.1%YoY growth in non-interest income to Rs 2.81bn. Lower credit off-take appears to have dented fee income growth contributing to a lower non-interest income growth. Revenues for the bank were up 12.8%YoY. Operating costs were up 13.8%YoY led by both staff costs and other operating expenses. Operating profits were up 13.8%, cost income ratio was stable at 37.2%.



Asset quality comfortable
Asset quality continued to remain strong with gross NPLs and net NPLs remaining steady at Rs 11.9bn and Rs.6.95bn, respectively. With net NPLs at 0.8%, despite higher slippages, asset quality continues at comfortable levels. Net slippage was reported at Rs 1.43bn.



Outlook & Valuations
Balance sheet expansion is expected to drive net interest income growth; spreads are likely to remain under pressure over the next couple of quarters as the bank is likely to absorb a section of the costs.


Indian Bank is likely to report a PAT of Rs 19.2bn for FY12 and Rs 24.34bn for FY13. A chunk of earnings growth is expected to accrue from top line which is expected to be driven by a 20% growth in the balance sheet.


At current levels the stock trades at 0.97X FY13E adjusted book value (standalone) and 4.08X FY13E EPS (standalone). Buoyed by superior net interest margins and aided by a higher leverage on equity Indian Bank enjoys a laudable return on equity in the PSU space. We expect the bank to be among the outperformers in the PSU banking space. With valuation having run up we rate the stock a MARKETPERFORMER on the stock with a target price of Rs 256. Key risks include a less than expected loan book expansion and a significant variation in spreads.


RISH TRADER