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Indian Bank (IB) reported NII of INR 17.6bn (8% y-o-y & 3% q-o-q) led by loan book growth of (15% y-o-y & 6% q-o-q) and marginal increase in spreads (8bps y-o-y & 5bps q-o-q). Higher other income of INR 5.7bn (16% y-o-y & 28% q-o-q) led by higher fee income and profit on sale of investments resulted in net total income of INR 23.3bn (10% y-o-y & 8% q-o-q). Modest opex of INR 10.9bn (13% y-o-y & 7% q-o-q) resulted in C/I ratio of 46.6% (131bps y-o-y & -34bps q-o-q). Higher than expected provision of INR 16.4bn (6% y-o-y & 77% q-o-q) resulted in net loss of INR 1.9bn for the quarter. GNPA / NNPA stood at 7.1% / 3.8% for the quarter respectively.
Sharp decline in slippages and higher provisioning led to better asset quality
GNPA / NNPA in absolute terms stood at INR 133.5bn / INR 67.9bn (1% / -10% q-o-q) and GNPA / NNPA in percentage terms stood at 7.1% / 3.8% (-35bps / -67bps q-o-q) respectively. Gross slippages declined sharply and stood at INR 9.6bn (-68% y-o-y & -46% q-o-q). This includes one major account of INR 3.2bn of TN power (part of IL&FS group). The total exposure to IL&FS group stands at INR 16bn of which INR 2.5bn is standard and the provisioning for the same stands at INR 3.1bn. SMA-1 / SMA 2 book in absolute terms has declined from INR 129bn / INR 39bn in H1 FY19 (7.8% / 2.4% of the loan book) to INR 92bn / INR 26bn (5.1% / 1.5% of loan book). The bank has restructured INR 9bn of MSME loans under RBI window. Total O/S standard restructured assets stood at INR 26.3bn (1.5% of loans). PCR incl /excl tech. w/offs stood at 65.7% / 49.1% (481bps / 649bps q-o-q) respectively. Out of the total provisioning for NPA of INR 14.3bn, INR 11bn came from divergence of which ~INR 4.5bn came from a single account. The provisioning hit was taken in Q2 FY19 itself, however it has been fully provided for in this quarter.
Credit growth of 15% y-o-y; Improvement in NIMs
Global gross advances stood at INR 1.88tn (15% y-o-y & 6% q-o-q) led by RAM credit which stood at INR 1.04tn (21% y-o-y & 5% q-oq) and comprises 56% of the global gross advances as against 53% a year ago. Within domestic advances, Retail / Agriculture / MSME sector grew by 24% / 25% / 15% y-o-y respectively. Corporate segment stood at INR 754bn (9% y-o-y & 8% q-o-q) and comprises 40% of the global gross advances. NII for the quarter stood at INR 17.6bn (8% y-o-y & 3% q-o-q) led by loan book growth and marginal uptick in spreads (3.09%). Global NIMs for the quarter stood at 2.95% (6bps y-o-y & 7bps q-o-q) for Q4 FY19. Other Income rose to INR 5.7bn (16% y-o-y & 28% q-o-q) led by higher fee income of INR 3.3bn (3% y-o-y & 28% q-o-q) and higher profit on sale of investment of INR 1bn (366% y-o-y & 67% q-o-q). Deposits stood at INR 2.42tn (16% y-o-y & 7.2% q-o-q) while CASA ratio declined from 35.7% in Q3 FY19 to 35.5% in Q4 FY19. The bank has guided a broad based loan book growth of ~13-15% and aims to maintain their NIMs ~3% for FY20E.
* In Q4 FY19, the bank added 33 branches taking the total tally to 2872 branches.
* CASA in absolute terms stood at INR 835bn (9% y-o-y & 6.4% q-o-q).
* As per Basel III norms, CAR stands at 13.21% at the end of Q4 FY19 with tier I capital at 11.29%.
* Slippages break up - Corporate - 65%; SME - 15%; Agri & Retail - 10% each.
1. Bank is expecting slippages to be ~INR 8bn per quarter ; GNPA / NNPA below 7% / 3.1% respectively.
2. NIMs - ~3%.
3. Cost to Income Ratio - 42-43% for H1 FY20E.
* Exposure to Stressed Entities:
1. DHFL: INR 12.8bn. Zero non-fund based exposure. All standard so far
2. ADAG: INR 2.5bn standard exposure and INR 1bn NPA.
3. ESSEL: INR 1bn standard
4. RKM Power: INR 5.5bn standard
5. IL&FS: INR 2.5bn standard.
Outlook & Valuation
By FY20E, we expect FPO of INR 8.4bn to reduce the government's shareholding from 82% to ~75%. We expect slippages to moderate going ahead and credit cost to remain elevated which will limit ROA / ROE expansion going ahead. Uncertainties over merger of PSU banks would remain an overhang on the stock. However, the risk reward situation looks favorable as P/BV stands 0.54x with ROA / ROE at 0.4% / 6.2% for FY21E respectively. We maintain our BUY rating on the stock with a TP of INR 301 (INR 296 earlier) valuing the bank at 10 year P/BV average multiple of 0.7x FY21E BV of INR 430.
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