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.

Stock Market Result Update on South Indian Bank for 2QFY2012

Stock Market Result Update on South Indian Bank for 2QFY2012 with an Accumulate recommendation.

For 2QFY2012, South Indian Bank (SIB) reported healthy net profit growth of 24.4% yoy (15.1% qoq) to `95cr, better than our (`83cr) and street estimates (`88cr). NIM expansion coupled with lower slippages was the key highlight of the results. We maintain our Accumulate recommendation on the share.

Healthy NIM expansion with improving asset quality: During 2QFY2012, the bank’s business growth moderated in-line with overall industry trends; however, it remained comfortably ahead of the industry. Advances grew by 3.9% qoq vis-à-vis marginal 0.2% growth for the industry (up to September 23, 2011). Deposits showed traction, rising by 4.5% qoq as compared to 0.8% growth for the industry. CASA deposits grew by relatively lower 3.5% qoq, leading to a marginal 20bp qoq compression in CASA ratio to 21.3% (down from 23.9% in 2QFY2011). With the pass-through of higher interest rates and a larger share of higher-yielding gold loans, the bank was able to improve its yield on advances further by 36bp qoq and 150bp yoy to 12.1% (for 1HFY2012). With wholesale funding costs remaining largely stable, the bank’s cost of deposits went up only marginally (6bp qoq), leading to a healthy ~50bp qoq expansion in calculated NIM for 2QFY2012. Asset quality was also largely stable during 2QFY2012, with absolute gross and net NPAs declining by 2.5% and 8.2% qoq, respectively, and provision coverage ratio excluding technical write-offs improving to 74.7%. Slippages surprised positively, coming in at just 0.5% (annualized) vis-à-vis 0.8% in 1QFY2012 in spite of deterioration in the economic growth outlook.

Outlook and valuation: SIB plans to raise ~`1,000cr in FY2012, which will enable it to maintain its strong growth, especially in its gold loan business. Currently, the stock is trading at moderate valuations of 1.1x FY2013E ABV. In light of capital raising and strong expansion plans, we value the bank at 1.2x FY2013E ABV and maintain our Accumulate view on the stock with a target price of `24.