Recommendation From Banking Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year

Indian Bank

COUNT ON GOOD GAINS WITH INDIAN BANK

HERE IS WHY
Healthy loan book
Robust capital position
Better performance than peers

Indian Bank is a medium-sized public sector bank owned by the Government of India. It is one of the oldest commercial banks. It has a substantial presence in South India as nearly 60 per cent of its branches are located in that region. It has a vast network of 2,839 branches and 3,787 ATMs in India.

The bank’s financial performance for the quarter ended December 2018 stands as follows: The net interest income (NII) rose 5.79 per cent YoY to Rs.1,716.7 crore in Q3FY19 from Rs.1,622.7 crore in Q3FY18. This was on account of higher interest reversals of Rs.180 crore. Its operating profit sank to Rs.1,146.6 crore in Q3FY19 from Rs.1,209.2 crore in Q3FY18, thereby plummeting 5.17 per cent. Margins shrank 9 bps QoQ to 2.88 per cent in Q3FY19. Net profit dropped to Rs.152.3 crore in Q3FY19 from Rs.303.1 crore in Q3FY18, thereby dipping 49.75 per cent. The share of the higher-margin RAM segment (retail, agriculture and MSME) stands at 59 per cent of loans and is likely to improve further. Total Income 4823.92 4700.85 4692.17 4463.89 4354.22

Both fee income and forex income declined 10.2 per cent and 8 per cent, respectively, on a QoQ basis. This resulted in a drop of 19 per cent YoY (and 4 per cent QoQ) in other income. The CASA deposit growth was subdued at 7.2 per cent YoY. This resulted in a decline in the CASA ratio to 35.7 per cent in Q3FY19 from 36.1 per cent in Q2FY19. Although slippages declined 22 per cent QoQ, they still remained elevated at Rs.1,750 crore owing to the downgrade of IL&FS exposure of Rs.6.6 billion. However, they are likely to moderate over FY2020.

Indian Bank reported return on assets (RoA) of 0.5x. Its price/book value (P/ BV) stood at 0.8x in FY18. The bank did not pay any dividend in FY18 although the dividend per share (DPS) stood at Rs.6 in FY17.

Despite these challenges, the loan book grew 15.4 per cent YoY to Rs.17,120 crore in Q3FY19. The bank enjoys a strong capital position with tier-I capital of 11.2 per cent. The improvement in the lending environment and growth in its loan book will aid in further growth in the upcoming quarters. The new management is focused on balance sheet consolidation. Although the overall growth is likely to normalize, the company still continues to perform better as compared to its peers as it delivered better capital/asset-quality ratios. The new managing director has guided for a moderate and calibrated growth trajectory.

The bank is emphasizing on profitability over growth. The management is of the opinion that corporate demand continues to remain laggard. However, moving forward, treasury support, improvement in margins and moderation in credit cost will enhance the bank’s return on assets and return on equity. Thus, by virtue of sound management, improving return ratios and superior performance in comparison to peers, we recommend our reader investors to BUY this stock.