Indian Bank - 1QFY18 Result Update - Strong Operating Performance Continues: BUY

Indian Bank - 1QFY18 Result Update - Strong Operating Performance Continues

Indian Bank has delivered a healthy operating performance in 1QFY18. Its operating profit surged by 38.7% YoY and 17% QoQ to Rs12.5bn led by strong growth in NII (18.1% YoY & 5.4% QoQ to Rs14.6bn) and relatively lower opex (10.9% YoY and -4.6% QoQ) of Rs8.6bn. Resultantly, the Bank’s net profit grew by 21.2% YoY and 16.5% QoQ to Rs3.7bn. However, fresh slippages increased to Rs7.1bn in 1QFY18 compared to Rs6.3bn in 4QFY17. Fresh slippages primarily came from one large corporate account along with recognition of NPAs from loan under special RBI moratorium post demonetisation. Further, the Bank’s operating revenue was supported by higher treasury profit and recovery from written-off accounts.

Management Commentary & Guidance

• Indian Bank has total exposure of Rs28bn to 8 accounts out of total 12 loans referred to Insolvency & Bankruptcy Code (IBC) by the RBI. Notably, the entire exposure to these accounts has already been classified as NPAs and the Bank has further provided for Rs1.3bn of additional provisioning towards these accounts in 1QFY18.
  
• The Bank’s loan book de-grew by 8.3% QoQ due to slowdown in infra loan portfolios. Notably, Retail and Agri loan continued to grow at healthy pace. The Bank expects 12-13% growth in loan book in FY18 led by Retail, SME and Agriculture segments.
  
• For FY18E, the Management looks forward to 12-13% growth in loan book and 10-11% growth in deposits. Growth in loan book will be driven by Retail, SME and Agriculture segment.
  
• The Bank’s NIMs improved by 27bps YoY and 4 bps QoQ to 2.8% led by 82bps YoY and 20bps QoQ decline in cost of deposits to 5.51%. It expects NIMs to reach 3% in FY18E.
  
• The Bank expects further improvement in asset quality led by 5% and 3% decline in gross NPA ratio and net NPA ratio by FY18-end from current levels of 7.2% and 4.1%, respectively.
  
• The Bank is planning to come out with fresh equity issue to comply with regulatory norms, which would bring down the Government of India’s stake to 75% from 82%.
  

Outlook & Valuation

Following an impressive 121% upsurge in last 12 months, we believe that the current stock price has discounted most of the near-term positives. Further, Government of India is mulling consolidation of public sector banks, which creates a very high level of uncertainty for the Bank’s future earning trajectory, as the balance sheet quality of several PSU banks is considered to be pathetic. Further, we expect the Bank will continue to witness elevated level of credit cost, which will keep its earnings and return ratios subdued over next 6-8 quarters. We change our recommendation on the stock to HOLD from BUY with an unrevised Target Price of Rs341 based on 1.1x FY19E Adjusted book value.