Bank On The Favourite Of India's Retail Investors

Retail investors might be having a reason or two to feel stressed at this time when markets are at their all-time high, especially when it comes to the banking stocks. So the stigma continues in terms of taking a final call--whether to buy or not at this level. In DSIJ, we will say the decision has to be taken on the basis of individuality of a stock--Indian Bank, a PSU one is one such case which still can be bought even though it is very near to its historical peak.

If we take a look at the banking sector, the sector is ripe for growth and could well be one of the fastest growing sectors in India for FY18. With several reforms in place for the banking industry, the very problems pertaining to the NPAs that scared investors away from investing into banks should become the very reason for investors to look at banks seriously again as the NPA problem may well be resolved in coming three to four years.

The main basis for investing in stocks like Indian Bank even at this level is the buoyancy of Indian economy still prevailing--but, if the growth numbers in near future depress us, NPA menace will haunt back and the sector may fail to deliver as per projections and expectations of a retail investors. So, this remains the key risk while investing in this stock as we consider both the pros and cons.

In spite of the challenging macro environment some of the banks (mostly PSUs) have generated returns in excess of 100% over last one year period.

INDIAN BANK

Set up in 1907, Indian Bank is a mediumsize public sector bank. The bank is amongst the oldest commercial banks with GoI having a stake of 82.1%. The other significant owners in the bank are Life Insurance Corporation of India (3.1%) , HSBC Global Investment Funds – Indian Equity (1.9%) and HDFC Trustee Company Ltd – A/C HDFC Mid-cap opportunities fund (1.9%). 

The bank has bigger presence in southern Indian states with approximately 60% of its branches in operation in that region. Indian Bank boosts of a network of 2,584 branches and 2,958 ATMs in India and also has three foreign branches in Singapore, Colombo and Jaffna.

The bank has been able to create successfully a niche for itself in an already crowded market and envisages to position itself as a “Mid-Size Bank' with focus on retail & mid-corporate segment in the medium to long-term period.

PERFORMANCE HIGHLIGHTS 

Indian Bank has been delivering an all-round performance. The performance has been impressive on the other income front and is led by higher core fee income as the service charges have been revised. The growth in the loan book for the consumer retail , agri and SME portfolio has been robust. 

The CASA ratio surged by 571bps YoY led by 23.2% & 1.5% YoY growth in CAs & SAs, respectively. While maintaining the steady growth rates, the bank ensured that the NPAs are not piled up. Lower fresh slippages helped the bank to contain net GNPA accretion and higher provisioning along with write-offs helped the Bank to contain growth in net NPA

MANAGEMENT OUTLOOK 

Indian Bank is expected to see a 12-13% growth in its loan book which is healthy and almost 10-11% growth in deposits. The growth in loan books is expected to come from Retail, SME and Agriculture segment for FY18.

As we can see in the table below the majority of the growth in loan book has been derived from the retail segment and the SME segment.

The bank continues to impress with its operational performance with NIMs improving by 32 bps YoY and 18 bps QoQ to 2.7% led by 32bps QoQ decline in cost of fund to 4.86%.

The management of Indian Bank expects the NIMs to reach 3% in FY18. With improvement in asset quality expected the bank remains an attractive investment option. The management expects the gross

NPA to come down to 5% from 7.5% and net NPAs are expected to come down to 3% from current 4.4%. levels. The fresh slippages in coming quarters are expected to be lower than the improvement in upgrade and recovery. If this were to happen in coming quarters the overall NPAs may come down from current levels.

CONCLUSION

Indian Bank's focused strategy of catering to retail segment and MSME segment is proving beneficial to it. Its focus on balance sheet consolidation and core operating parameters can be expected to lead the bank to further deliver stable and improved earnings.

The macro environment looks to be stable as of now and the challenging environment seems to be subsiding for the banks in general with several steps being taken by the government to resolve the problem of non-performing assets. More power with banks to deal with the NPA issue is a welcome sign for the banks in general.

Indian Bank is well capitalised and it will soon be planning for a follow on public offer (FPO) to reduce the GoI shareholding to 75% from 82%. The loan growth can be expected to be steady and any improvement in the loan growth can improve the operating leverage for the bank. With improvement in the efficiency and clarity in the growth strategy, the bank remains a topperformer in the PSU banking space. 

The risk however remains if the credit growth slows down from its current levels and if there are any material changes in the asset quality front. Owing to the growing competition in the retail and MSME segment, Indian Bank may face some headwinds to credit off take. Having said that, with superior operating performance and manageable NPAs the stock is a 'BUY' with a long term view.

(Researched & analysed by Yogesh Supekar)

The NPA Cycle Does Not Seem To Have Peaked Out Completely

Are PSU banks good investment bets at the current juncture? 

The Nifty PSU Bank Index has grown 25.7% YTD as on 5 May’17. While it had corrected immediately post demonetisation to 2910 level on 26 Dec’16, the index saw an increase of ~29% since then. Apart from higher liquidity, sudden spike in CASA ratios and strong belief in government reforms for overall growth, this increase in stock prices was also based on two major expectations – 1) that the worst is over on the NPA front and 2) An expected recovery in advances growth once the impact of demonetisation eases. It must be noted that the NPAs in the banking system especially for PSU Banks, at an average of ~12.5% as on 31 Dec’16, are exceedingly high and that it would take nothing less than 6-8 quarters for this situation to get back to normal levels of sub 5% for PSUs. However, the incremental slippages are steadily reducing and the rate of loan recovery is likely to improve on the back of normal monsoon, improving execution of infra projects, better demand for MSMEs and the overall economic growth. With this it may be an appropriate time to enter into some of the good quality PSU Banks that are available at lower valuations. 

Various initiatives have been taken by current govt to tackle the PSU's NPA problem and has NPA cycle peaked out? 

The NPA cycle does not seem to have peaked out completely as yet but could be close. While most of the bad assets and/or stressed accounts have been reported and largely provided for – once post the AQR, then by banks & NBFCs willing to clean up their books and most recently by RBI’s divergence report wherein it directly put a check on the banks’ asset books. Furthermore, the government has designed a new framework for dealing with the Rs6 lakh crore worth of NPAs in the Indian Banking System, including an ordinance to amend the ‘Banking Regulations Act’ and give RBI a larger power to dig into the banks’ asset book and fetch out NPAs. With this measure, there is a likelihood of few more large or small accounts to slip into the NPAs, which otherwise were reported either as stressed accounts or as standard assets as they made some part payment on regular basis. Payal Pandya, Research Analyst, Centrum Wealth The NPA Cycle Does Not Seem To Have Peaked Out Completely