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Mixed quarter, earnings to gradually improve; retaining a Buy

Higher NIM and lower opex led to a 1,109 q/q improvement in Indian Bank’s C/I ratio to 41.9%. Higher credit costs (~2%) led to muted profitability, with the RoA at 0.7%. Slippages were elevated; however, higher write-offs led to improved GNPAs. Ahead, we expect slippages to moderate substantially as most of the stress has already been recognized. Besides, we expect the bank to gain market share from its peer banks. We retain our positive view on it, at a TP of Rs205, valuing it at 0.5x P/ABV on its FY24e book.

Slippages remain high, GNPA.

Q1 slippages were Rs30bn (3.1% of loans), of which ~50% stemmed from the restructured pool. Stress in the corporate and agri. segments came down; however, MSME and retail saw slight deterioration in asset quality. With the bulk of the accounts, stressed by Covid’19-related restrictions, already delinquent/restructured in the last couple of quarters, we expect slippages to moderate from Q2. The GNPA ratio fell 34bps q/q to 8.1% due to higher write-offs. The bank’s overall collection efficiency (CE) slightly decline to ~94% in Q1 FY23, from 95% the quarter prior.

Credit growth to pick up.

The bank’s loan book was Rs3.9trn (up ~9% y/y). The corporate portfolio (~37% of loans) shrank 2.5% y/y. This was in line with management’s strategy of focusing on granular retail lending. With a cleaner balance sheet, adequate capital and a strong deposit base, we expect a pick-up in credit growth from next quarter; accordingly, we model ~12% for FY23/24.

Valuation.

Our Aug’23 target of Rs205 is based on the two-stage DDM model. This implies ~0.5x P/ABV multiples on its FY24e book. Risks: Lumpy slippages from the corporate book; lower-than-expected loan growth.

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