Stock Market Result Update on Indian Bank for 2QFY2012

Stock Market Result Update on Indian Bank for 2QFY2012 with an Accumulate recommendation and a Target Price of `227 (12 months).

For 2QFY2012, Indian Bank reported a healthy set of numbers. The bank’s net profit grew by 12.7% yoy to `469cr, above our estimates, partly due to `40cr of non-recurring interest income on income tax refund (classified under other income) and higher recoveries than estimated by us. We recommend an Accumulate rating on the stock.

Strong growth in business; Slippages rise sequentially: Net advances grew by 3.9% qoq and 23.5% yoy to `85,765cr and deposits grew by 5.2% qoq and 18.6% yoy to `116,218cr. CASA deposits growth was moderate at 1.2% qoq (9.5% yoy) to `34,617cr, leading to 120bp sequential decline in CASA ratio to 29.8%. The bank’s yield on advances improved by 94bp qoq to 12.1%, leading to a sequential increase of 33bp in reported NIM to 3.8%. Non-interest income increased by 20.7% yoy (up a strong 37.3% qoq) to `342cr. Treasury income was lower at `21cr, registering a sequential decline of 55.3%. The bank classified interest income of `40cr received on account of income tax refund under non-interest income in 2QFY2012. Removing its effect, core fee income excluding treasury grew by 6.6% yoy (up strong 38.9% qoq). Recoveries picked up and more than doubled during the quarter, although on low base, to `40cr. The bank had already switched over to system-based NPA recognition in FY2011, however still slippages more than doubled sequentially to `380cr, primarily on account of three large accounts becoming non-performing during the quarter. Consequently, gross NPA ratio weakened to 1.2% (1.0% in 1QFY2012) and net NPA ratio weakened to 0.7% (0.5% in 1QFY2012). Management is guiding for a quarterly run rate of `200cr-250cr in slippages going forward.

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 0.85x FY2013E ABV, which is below our target multiple of 0.9x FY2013 ABV. Hence, we recommend an Accumulate rating on the stock with a target price of `227, implying a 5.5% upside from current levels.