Buy Indian Bank; target of Rs 310: Sushil Finance

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Buy Indian Bank; target of Rs 310: Sushil Finance

Sushil Finance is bullish on Indian Bank and has recommended buy rating on the stock with a target of Rs 310 in its June 25, 2011 research report.

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Sushil Finance is bullish on Indian Bank and has recommended buy rating on the stock with a target of Rs 310 in its June 25, 2011 research report.

"Indian Bank has posted a net profit of Rs.4.4 bn, an increase of 7% YoY during Q4FY11 on the back of a decent growth in Net Interest Income (NII). Its non-interest income remained muted for the quarter."

"During Q4FY11, Indian Bank posted 19% YoY growth in the NII, mainly due to a strong 20% growth in advances. Its deposits grew by 20%, while its CASA deposits grew at 15% and its CASA now forms 31% of its total deposits. The Bank targets a CASA ratio of 33%-34% by Sept 2012. The Bank repo-interest income during Q4FY11. An increase of 35% YoY was seen in operating expenses on higher branch expansion and on account of provisions made for New Pension Scheme (NPS) for existing employees (Rs.1626.4 mn in FY11) and one time pension provision for retired employees (Rs.1483.4 mn in Q4FY11) as per RBI guidelines. Remaining NPS Liability for existing employees (Rs.6506.2 mn) will be amortized over next four years. The Cost-Income ratio stood at 34.7%, declining by 560 bps on YoY basis but improving on QoQ basis by 390 bps in Q4FY11. The Bank expects the ratio to improve further on higher fee income."

"NIMs during Q4FY11 increased to 3.86% (from 3.78% in Q4FY10) mainly due to higher yields on advances. The Bank expects the impact of 50 bps hike in savings rate by RBI, to be approximately Rs.1500 mn, which translates in a 11 bps impact on NIMs. We expect NIMs to fall by 13 bps in FY12E (from 3.75% in FY11) given that the Bank may not be able to fully pass on the impact of higher deposit rates in savings as well as in term deposits."

"During Q4FY11, the Bank managed to bring both the gross NPAs and net NPAs below 1% levels, which had seen a spike in Q1FY11 due to migration to system, based recognition of NPAs. Its gross NPAs stood at 0.98% and net NPAs stood at 0.53%. On QoQ basis, both the gross NPAs & net NPAs have seen a downfall due of higher recoveries. The Bank's total provisions fell on YoY basis but rose on QoQ basis to Rs. 1.27 bn, as a result of which, its provision coverage ratio now stands at a healthy +84%. Considering the substantially high NPA provisioning done by the Bank, we believe the Bank won't face much of a problem in managing its asset quality going forward. The Bank expects no additional impact on NPA provisions as the bank provides 20%, 100% & 100% for secured portion of Sub-standard, Doubtful 1 & Doubtful 2 category respectively besides providing 100% for unsecured portion of NPAs as against RBI's earlier prescription of 10%, 20% & 30% respectively."

"Considering decent FY11 result, we have largely retained our FY12 estimates and introduced our FY13 estimates. We expect Advance and Deposit growth of 18.7% & 16.9% in FY12E and 18.4% & 16.8% in FY13E, while it's Net Profit to grow at 15% & 18% in FY12E & FY13E respectively. The Bank currently trades at an attractive valuation of 0.8x FY13E ABV and 4.0x FY13E Earnings. We believe that the stock can trade at ABV multiple of 1.2x given its strong business model and sustainable ROE of +19%. We maintain "Buy" rating on the Bank with price target of Rs 310 (at 1.2x FY13E ABV and 5.8x FY13E EPS)," says Sushil Finance research report.

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