Stable performance with attractive valuation
Indian bank is a mid-sized bank in the public sector, with a loan book size of ~Rs194,000cr and deposit base of ~Rs253,000cr. The bank operates through a network of 2,884 domestic branches largely distributed across the Southern states.
* The merger of Indian bank and Allahabad bank to make it the 7th largest public sector bank, with nationwide presence.
* The Net Interest Income (NII) grew at 7.6% YoY due to higher growth in cost of funds compared to that of the interest yield.
* The total income grew at 20% YoY supported by 72% YoY growth in other income, with an improved profit in sale on investments.
* The banks loans/deposits grew at 13%/15% YoY in Q2FY20.
* Asset quality improved with GNPA/NNPA at 7.2%/3.54% compared to 7.33%/3.84% in the last quarter.
* We reduce our valuation to 0.35x BV of FY21E and retain our Buy rating with a revised downward target price of Rs156.
The merger with Allahabad bank to form the 7th largest PSU Bank
In the mega bank merger announced by the Finance Minister in late August 2019, the Allahabad Bank is merged with Indian bank, which makes it the 7th largest public sector bank in the country with a nationwide presence spread over 6,100 branches and around 43,000 employees. The total gross advances of the merged entity to be around ~Rs3.5 lakh crore and the deposits to be around ~Rs4.6 lakh crore. At present, Indian bank is having a strong presence in South India, with over 60% business network from the region, and Allahabad bank having significant presence in Northern & Eastern region, to give a strong pan India presence for the merged entity.
Decent operating performance backed by other income growth
The Net Interest Income (NII), which is the interest income less interest expense, has grown at a ~7.6% on a YoY basis, mainly due to 19bps increase in cost of funds for H1FY20 compared to that of H1FY19 and a 6bps YoY increase in yield on advances for the same period. The other income has increased by 72% on a YoY basis, supported by the profit on sale of investments & PSLC (Priority Sector Lending Certificates) income. The pre-provision operating profit (PPOP) has registered around ~26% YoY growth backed by a moderate expenditure growth at ~14% YoY.
Consistent performance with loans/deposits growing at 13%/15% YoY
The bank’s total loans & advances have grown at 13% on a YoY basis supported by MSME (↑20%), retail (↑17%) and agriculture loans (↑16%). Overall, the RAM (retail, agriculture & MSME) sector grew by 17.3% on a YoY basis, and currently constitutes around 61.2% of the total loans & advances, compared to 58.7% a year ago. The bank’s total deposits have increased by 15% YoY, with CASA deposits growing at 10% YoY, with CASA ratio marginally declining to 33.8% and the Term deposits growing at 18% YoY. The Cost to Income (C/I) ratio improved to 42.3% compared to 44.8% in Q2FY19.
Asset quality improved with reduced slippages from corporate book
In the current quarter, the gross NPA has marginally deteriorated by 4bps on a on a YoY basis, however improved by 13bps sequentially to 7.2%. At the same time, the net NPA has improved to 3.54% compared to 4.23% in Q2FY19 and 3.84% in Q1FY20. The slippages from the corporate book stands at Rs311cr, compared to that of Rs1,189cr in Q2FY19.
We expect the proposed merger to bring in temporary short term slowdown in the banks business and we expect some corporate slippages in the 2nd half of FY20. However, currently the bank is trading at a lower P/B of 0.31x and 0.29x respectively for FY20E and FY21E, which is at a significant discount to its long term average. Hence, we reduce our valuation to 0.35x BV of FY21E (from previous 0.5x) with a revised downward target price of Rs156 and retain our Buy rating.
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