Indian Bank - Chunky slippages continue to mar performance - Centrum

Indian Bank saw a large sequential rise in gross NPLs (60% QoQ) with nearly one-third of the slippages (6%) explained by three large corporate exposures; an outcome of the bank's skewed loan portfolio. While asset quality risks remain, we draw comfort from cheap valuations (0.8x FY14E ABV), comfortable Tier-1 ratio (~11%) and strong revenue profile (NIM over 3%) & healthy return ratios (15-16%). We maintain Buy.

Asset quality stress continues: Indian Bank's asset quality challenges emanating from skewed loan mix (corporate exposure at 51%) continued in Q3FY13 as well. Gross NPLs increased by 60% QoQ (absolute) to 3.2% of loans (2.1% in Q2FY13). We note that nearly one-third of the overall slippages (6.1%) were driven by three chunky corporate exposures (infrastructure, glass and auto). The overall provision coverage ratio declined 1000 bps QoQ to 61% as a result of worsening asset quality matrix. Outstanding restructured loans came off marginally to 9.9% of loans, which appears high due to reporting format (all facilities of the borrower are reported). We remain cautious on the bank's asset quality though recoveries from high slippages in the last 2 quarters could surprise positively.

Margins decline 5bp QoQ to 3.1%: NII for the quarter stood at Rs11.4b (6% below estimates) led by 5bp QoQ decline in margins to 3.07%. The 5bps QoQ decline in yield on loans and 10bps QoQ increase in cost of funds led to decline in margins. Overall, the decline in pricing power and lowering of lending rate coupled with higher slippages would have impacted yield on loans and in turn margins. Going into FY14, NIM could witness further pressure given high concentration in corporate segment and possible erosion in proving power in general.

Loan growth subdued at 13.6% YoY: Loans for the quarter grew below the industry average, at 13.6% YoY, mainly due to slower growth in large-ticket corporate loans (9% YoY). The share of corporate loans fell to 51% from 55% in FY2012 as management continued its focus of reducing the share of corporate loans (7-9% growth recently vs 25-30% earlier). All other segments saw strong growth: retail loans grew by 17% YoY, agriculture loans by 17% YoY and loans to SME by 23% YoY. Infrastructure exposure remains at ~20% of overall loans with power forming 12% including SEBs which formed ~75% of the exposure in the power sector. Given the asset stress, loan growth is likely to remain subdued over the near term.

Well capitalized: Tier-1 capital is comfortable at 10.8% (12% including profits for 9MFY13) with overall capital adequacy ratio at 13.0%. The bank is reasonably well-capitalized and would not require dilution in the near term.

Maintain Buy: Notwithstanding the asset stress, we remain positive on the stock led by inexpensive valuations (0.bx FY14E ABV), strong capital (tier-1 ratio of 10.8%) and healthy NIMs (~3% levels) which should act as a cushion against potential rise in slippages/restructuring. We maintain Buy with a revised target price of Rs225.

Source : Equity Bulls

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