Indian Bank

Fresh investments can be considered in the Indian Bank stock. Over a two-year horizon, the bank has room to expand its net interest margins, even as it delivers strong credit growth. Indian Bank is a mid-sized public sector bank with almost 40 per cent of its branches in Tamil Nadu. It is one of the first movers in the public sector to migrate to core banking solutions.

At the current price of Rs 134, the stock trades at about 4 times its trailing one-year earnings and near its book value of Rs 135.

The bank has posted high earnings growth in recent quarters boosted by surging net interest income, without much help from one-time treasury gains.

Not only has Indian Bank seen steady business growth in the past few quarters, it has strong profitability ratios (with Return on Equity and Return on Assets at 23.3 per cent and 1.62 per cent respectively, as of March 31, 2009) and superior asset quality (net NPA ratio of 0.4 per cent). It has managed to improve net interest margins (3.6 per cent) while other banks have seen margins contracting.

The bank has a comfortable Tier-1 capital adequacy (12 per cent against mandatory 6 per cent) and has sufficient head-room to raise capital.
Advances Book

Indian Bank’s loan book is focussed predominantly on large and medium corporates (50 per cent of the total credit) followed by retail and agricultural lending; the last two have aided the bank’s overall advance growth in recent times.

Indian Bank’s advances grew at a compounded annual rate of 29 per cent during the period 2004-09.

However, for the quarter ended June 30, advances growth moderated to 17 per cent, partly attributable to companies postponing their capex in view of the General Elections and the Budget.

For Indian Bank, corporate credit grew by a modest 14 per cent. Sequentially, Indian Bank saw its credit-deposit ratio moderate from 71.4 per cent to 67.7 per cent; this is the below the industry average.

The lower credit-deposit ratio will not allow the bank to benefit much from falling rates as the deposits are deployed in lower yielding assets.

Financials

For the period 2004-09, the bank’s net profit grew at an annual rate of 32 per cent. Indian Bank continued this momentum in the June quarter with a net profit growth of 52 per cent, thanks to net interest income growth and ‘other income’ accretion.

Core non-operating income accounted for a low 7.5 per cent of the total, among the lowest in the public sector space. Improvement in net interest margins (NIM) from 3.17 per cent to 3.56 per cent helped the bank post strong top-line growth despite the moderation in advances.

While Indian Bank is one of the few to have witnessed improvement of NIM this quarter, the trend can be expected to receive support over the medium term as the benefits of the deposit rate cuts actually start flowing in.

A modest increase in low-cost deposits and retirement of bulk-deposits helped the bank reduce its cost of funds, propping up the NIMs.

A cost-income ratio of 42 per cent results in better operating efficiency than most of its PSB peers.

The bank’s provisions fell by 28 per cent in the latest quarter as incremental slippages were low.

The recent RBI mandate to shift the floating provision account reduced the bank’s provision coverage, increasing its net NPA ratio to 0.4 per cent from 0.18 per cent.

The gross NPA ratio of 0.91 per cent places it among the better banks in terms of asset quality; after factoring in restructuring in the last few quarters.
Outlook

Indian Bank may witness higher-than-industry credit growth, given the expected pick up in corporate credit offtake with the recovery gaining pace.

As the bank enjoys high levels of capital adequacy, it is well-positioned compared to most of its mid-sized peers to expand its advances book.

The key concern for the bank is the agriculture portfolio turning sticky due to a weak monsoon; however, the government can be expected to step in on this count.

Though Indian Bank has restructured a significant 8.4 per cent of its loan book, the amount sacrificed in restructuring is low (1.2 per cent of total restructured amount as of March 2009) limiting the losses on this count.

While the bank’s credit-deposit ratio has improved in the last few years from 49.8 per cent for 2004-05 to 71.4 per cent for 2008-09, there has been a moderation in the recent quarters.

Margins may come under pressure, if the ratio does not improve. Reviving equity markets can be expected to boost fee income.

via BL