Indian Bank. Indian Bank: A resilient player

As part of the Centre’s mega recapitalisation plan last year, about ₹88,000 crore of capital was allocated to 20 public sector banks. Indian Bank was the only PSB that didn’t receive capital from the Centre last fiscal; it has received capital just once in 2014-15.

The bank’s relatively stronger capital adequacy ratio among its public sector counterparts, lower gross non-performing assets (GNPA) and a more resilient earnings performance are key positives. Indian Bank’s earnings have been in the green in the past three years, even as most other PSBs reported huge losses in one or more fiscals.

In the latest June quarter, the bank delivered strong growth in net interest income, thanks to healthy loan growth and recoveries in interest income. The bank’s GNPA ratio has also dipped marginally in the June quarter over the previous March quarter. Higher recoveries and upgrades were the other positives in the bank’s quarter performance.

Investors wanting to bet on the gradual recovery in the banking sector can buy the stock of Indian Bank, that is delivering better on most metrics among the PSBs. While the bank’s return ratios may not be on a par with some of the stronger private sector banks, inexpensive valuations make it attractive.

Given that the impact of the RBI’s February diktat — that requires banks to report even one-day defaults and draw up resolution plans within 180 days — is still unclear, there could be some interim pressure on asset quality and earnings. Hence, investors with a long-term perspective of at least three to five years should take exposure in the stock.

At the current price of ₹331, the stock trades at about 0.9 times one-year forward book value. On adjusted book value too (book value adjusted for net non-performing assets), the stock trades at a reasonable 1.2 times.

Inching up

Over the years, the bank has been reducing its exposure to the corporate portfolio and, in turn, increasing focus on high-yielding retail and MSME portfolios. This has resulted in better net interest margin and profitability for the bank.

After a subdued growth in loans over the past two to three fiscals, Indian Bank has reported a strong 23 per cent Y-o-Y growth in loans in 2017-18. Reorientation of business strategy with focus on retail and MSME sectors appears to be paying off. Retail portfolio grew by a strong 32 per cent, while MSME grew by 21 per cent Y-o-Y.

In the June quarter, loans grew 23 per cent Y-o-Y, led by retail that grew by a strong 29 per cent. MSME too grew by a healthy 24 per cent.

The bank’s net interest margin has been going up steadily over the past three years —from 2.3 per cent in 2015-16 to 2.9 per cent in 2017-18. Shedding high-cost deposits, increasing the share of low-cost CASA deposits and rebalancing portfolio with focus on high yielding retail and MSME portfolio, has led to the notable rise in net interest margin. Aided by healthy growth in loan book and recoveries in interest income, net interest margin further inched up to 3.1 per cent in the June quarter.

But despite healthy growth in net interest income and 33 per cent Y-o-Y fall in bad loan provisions, a sharp rise in provisions on investment depreciation (mark-to-market losses on government bond investments) impacted the bank’s net profit for the June quarter.

While the balance MTM losses staggered over the coming quarters will impact earnings, a healthy growth in loans and steady net interest margin should provide cushion to earnings.

Given that about 59 per cent of the bank’s loan portfolio is linked to the MCLR (marginal cost of funds-based lending rate), rise in interest rates should help yields and mitigate the rise in cost of deposits.

Asset quality improves

Indian Bank has among the lowest NPA ratios within the PSU banking space. The bank’s GNPA ratio has been in the 6-7 per cent range over the past three years. In 2017-18, the bank’s GNPA ratio fell to 7.37 per cent from 7.47 per cent in 2016-17. In the latest June quarter, the GNPA ratio inched further lower to 7.2 per cent.

Fresh slippages and addition to bad loans, after climbing to about ₹3,000 crore in the March quarter, came down to ₹1,440 crore in the June quarter. Overall, stressed accounts (GNPA + restructured accounts) were 8.4 per cent of loans as of June 2018, down from 10.5 per cent in the same period last year and from 8.6 per cent in the March quarter. Recoveries of around ₹900 crore in the June quarter was led by two major accounts (Bhushan Steel and Electrosteel).

The bank’s total exposure to NCLT accounts is ₹4,800 crore (44 accounts) and the bank expects recovery of about ₹973 crore from 16 accounts before March 2019.

Indian Bank is also adequately capitalised, which is a key positive for the public sector bank, when many others are barely meeting their regulatory requirement. Aside from providing cushion to absorb sudden risks of default, a higher capital buffer will also help fund the bank’s growth.

The bank’s Tier I capital ratio stood at 11.55 per cent as of June 2018, among the strongest within the public sector banking space. The bank has obtained an umbrella approval from the board and shareholders for raising equity capital upto ₹7,000 crore. The quantum and timing of raising capital will be based on requirement and market appetite.

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