Indian Bank

For 4QFY2011, Indian Bank reported net profit growth of 7.1% yoy to `439cr, below our estimates of `486cr mainly on account of higher tax provisioning (43.5% effective tax rate for 4QFY2011) than factored in by us. Further, improvement in asset quality over the last quarter was the key positive of the result. We recommend an Accumulate rating on the stock.

Stable margins with improving asset quality: Net advances for the bank grew marginally by 1.8% qoq and 21.1% yoy to `75,250cr, while deposits grew by 4.7% qoq and 19.9% yoy to `1,05,804cr. CASA ratio as of 4QFY2011 stood at 30.9%, down 116bp compared to 32.0% in 3QFY2011. Reported NIM for 4QFY2011 stood at 3.86%, 2bp higher than 3.84% in 3QFY2011. During the quarter, non-interest income grew by 9.2% qoq (down 7.3% yoy) to `272cr. The bank’s asset quality improved during the quarter, with gross and net NPAs in absolute terms declining by 1.6% qoq and 4.8% qoq, respectively. Gross and net NPA ratios of the bank improved marginally by 4bp each to 0.98% and 0.53%, respectively, with a provision coverage ratio of 84.3% including write-offs.

Outlook and valuation: The bank’s relatively higher rural and semi-urban presence has enabled it to maintain reasonable cost of funds, resulting in more resilient NIMs than other mid-size PSU banks. At the CMP, the stock is trading at 5.2x FY2013E EPS of `47.1 and 1.0x FY2013E ABV of `256.5, which is below our target multiple of 1.1x FY2013 ABV. Hence, we recommend an Accumulate rating on the stock with a target price of `269, implying a 9.0% upside from current levels.