Thursday, August 9, 2012

>INDIAN BANK: Q1FY13 Result Update

Positive surprise on asset quality drives PAT beat

INBK’s Q1FY13 operating performance was in-line even though the bottomline beat our estimates materially led by sharply lower provisions. Sequential improvement in GNPA (16% absolute, 40bps relative decrease) led with meaningful recoveries and upgrades while slippages were contained at 1%. Restructured book (10% of loan – on borrower basis) is behaving well with one of the lowest slippages (~10% of restructured assets). The stock should reverse the de-rating suffered post Q4FY12 results given rebound in return ratios and positive surprise on asset quality. We maintain Buy on the stock led by inexpensive valuations (0.7x FY14E), strong capital (tier-1 ratio of 10.7%) and healthy NIMs (~3.2% levels) which should act as a cushion against the potential rise in slippages/restructuring.

Reported NIM expands 15bps QoQ while loan growth slows to 14%: NII grew by a moderate 12% yoy (in-line) to Rs11.5bn as a healthy NIM expansion (15bps QoQ) helped offset moderation in credit growth to 14% YoY. The NIM expansion is primarily led by ~40 bps QoQ expansion in loan yields which was partly offset by lower investment yields and slightly higher cost of funds sequentially. The moderate loan growth can be traced to lower traction in MSME and the corporate segment as the bank has turned more cautious and
selective in credit origination given the operating environment.
Asset quality surprises positively: After material surprise in Q4FY12, INBK improved its asset quality position and delivered on its guidance. The GNPA improved sequentially by 16% in absolute terms and 40 bps on relative terms. The improvement, importantly, was the result of higher recoveries and upgrades during the quarter as the bank had stepped up recovery efforts post Q4FY12’s negative surprise. Restructured loans increased by Rs15bn to 10% of loan book (on borrower basis) with cumulative slippages contained at ~10% (one of the best among PSB peers). Notably, nearly half of the restructured assets are performing and hence the restructured assets will shrink to 4.5% of loans if the recommendations of the working group on restructuring are implemented.

Non-interest income remained weak: In an otherwise healthy performance, the non-interest income performance was quite weak with 11% YoY degrowth. The moderation in fee income stream is broad based with treasury and fx lines contributing the most.

Accumulate: Notwithstanding the difficult operating environment, we remain positive on the stock led by inexpensive valuations (0.7x FY14E), strong capital (tier-1 ratio of 10.7%) and healthy NIMs (~3.2% levels) which should act as a cushion against potential rise in slippages/restructuring. Given the strong rebound in return ratios led by part reversal of asset quality pain in Q4FY12, we believe that the management has delivered on its guidance. In line, we expect the de-rating suffered since Q4FY12 results to reverse gradually with stock likely to move back to Rs230-240 range in the near term. We recommend investors to accumulate the stock on declines with a revised target price of Rs240 (from Rs270 earlier).