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Higher Provisioning to Impact Near-term Earnings
Whilst Indian Bank’s reported operating metrics were largely in-line in 4QFY19, PAT missed our estimate led by higher-than-expected provisioning, ~30% of which was for 1 account, where additional provisioning was made as per the RBI’s divergence report for FY18. Quarterly slippages at 2.6% were much lower than those of 4.1% in FY19, which aided 35bps QoQ decline in gross NPA ratio. Higher provisioning also led to 650-bps rise in PCR (excluding technical write-offs) to 49% as of 4QFY19. Loan growth at 6% QoQ (+16% YoY) was mainly driven by corporate and retail loans. CASA deposits improved by 6% QoQ, though CASA ratio declined by 200bps YoY to 35.6%. Margin expanded by 10bps QoQ led by a declining share of investments and lower slippages. We expect RoAs to remain muted in the interim period on elevated credit cost and weakness in core operating metrics.
Slippages to Moderate; Ageing-related Provisioning to Remain
The Bank’s fresh slippages declined during the quarter to Rs10bn or 2.6% of advances. Moreover, SMA-2 ratio declined to 1.5% in 4QFY19 from 2.3% in 4QFY18. However, segmental NPAs were higher across retail, agri and MSME segments over previous year, though they remain lower than other PSU peers. The Bank recognised Rs14bn exposure to IL&FS group as sub-standard over the last two quarters, against which 23% has been provided. Slippages are expected to moderate, going forward mainly be led by lower corporate slippages. While we expect overall slippages to decline to 2.7% in FY20E from 4.1% in FY19, credit cost is expected to remain elevated at 2.2% in FY20E.
Capital Position Continues to Remain Strong
With CET 1 and Tier I ratio remaining at 11% and 11.3%, respectively in 4QFY19, the Bank continues to remain well- capitalised to fund any imminent growth opportunity. Growth in RWA remained flat in FY19 even as total assets grew by 11% YoY, which aided capital usage. Notably, healthy internal accruals in the past and low capital consumption have been aiding the Bank’s capital adequacy ratios over the last few years, even in the absence of any GoI infusion/capital-raising.
Loan Growth Key to Operating Performance
Though healthy capital position continues to aid the Bank’s loan growth prospects, we expect margin expansion to be limited, as incremental loan growth is mainly driven by low-yielding segments like home loans and better-rated corporates. Moreover, core fee income growth also remained weak in the recent past (at 8% in FY19). We factor in PPoP growth of 17% over FY19-21E after a 2.5% decline in FY19, mainly driven by healthy growth in advances.
Outlook & Valuation
While recoveries from larger accounts under IBC will aid the Bank’s asset quality and profitability, credit cost is likely to remain elevated in the interim period. Thus, we expect its RoAs to continue to remain weak in FY20E at 04%, even as it is likely to rise to 0.7% in FY21E as credit costs moderate. Moreover, consolidation related concerns for PSBs could also negatively impact the Bank’s valuations. We maintain our HOLD recommendation on the stock with a Target Price of Rs250, valuing it at 0.8x FY21E ABV.
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