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Focused on profitability vs growth; wellcapitalized among PSBs

We met Indian Bank’s MD & CEO to discuss the bank’s near-to-medium term business strategy amid the increasing global & macro uncertainty; key takeaways:

* Unwavering focus on margins, instead of chasing credit growth: Bank maintains clarity on achieving growth without compromising on margins; thus, it would avoid chasing growth in its corporate book. Consequently, bank guides for 13-14% credit growth in FY23 (lower than the system at 15-16%) and foresees maintaining a similar trend in FY24, based on macro conditions and focus on margins. Though current blended CoF is 4.3%, incremental CoF is >6% on TDs; hence, the bank would continue to focus on growing its RAM book (Retail – Housing/VF/Gold loans; Agri – Agri Gold loans and MSME) to support margins. Within Retail, the bank plans adding express PL as a new product, while maintaining its dominance in retail/agri gold loans as well as offering SHG loans. Bank logged its highest-ever NIM, of 3.7% in 3Q (due to interest recognition on NPA recovery + asset repricing), but believes that a blend of improving LDR (low at 71% now), growth in the RAM segment, repricing of the MCLR book (highest among PSBs at 56%) and repricing of the investment book will help protect margin, keeping it well above 3%

* Plans to build new CASA and retail deposit pockets: Indian Bank benefited the most from its merger with east-India based Allahabad Bank, in terms of CASA, which stands high at 40% amongst peers. However, CASA is under pressure for most banks due to cannibalization towards TDs as well as competition from NSS (National Saving Schemes) and other alternative investments. Bank has been rationalizing its branch network since long post-merger, and would now look to expand the network to new SA/retail deposit pockets, for mobilizing deposits. Bank will also focus on NRI/HNI deposit pockets, with targeted deposit products. Management understands that such measures will bear fruit in the medium-to-long term and, thus, its immediate focus will be on sweating the existing branch network and client relationships, while managing credit growth in sync with deposit growth to maintain ALM

* NPA ratios to trend down; relapse from restructured book to be lower: Bank has recovered well from the merger/ILFS pain, with its NNPA ratio now being one of the lowest among PSBs, at 1% (after SBI/BOM, and similar to BOB’s). Bank believes that the overall slippage ratio in FY23 would be <2%, which should sustain, in the absence of lumpy corporate NPAs. Bank’s exposure to Adani is lower than 0.5% of loans/4% of NW and is largely in operational assets. Agri slippages remain volatile, but Mgmt believes that the recovery rate is far better now, as nearly 53% of the agri loans are backed by collaterals which is unique for Indian Bank. Restructured book stands higher for the bank at 3.4% vs peers, as the bank has been relatively liberal in restructuring; but relapse rate would be lower and is well provided for (15%). Bank will also be one of the key beneficiaries from the resolution of accounts like Srei Infra, ILFS, etc.

* We retain BUY: We expect the bank to report 0.8% RoA in FY23E and reach 1% by FY24E/FY25E, led by a healthy margin trajectory, improving fees (incl. PSLC) and normalization of credit cost (1.1-1.2%, from a high of >2%). Additionally, Indian Bank is one of the few PSBs to remain well capitalized, with CET 1 at 13.2% (including 9MFY23 profit), thus posing no risk of equity dilution for investors, unlike peers. The current MD & CEO’s term is till Sep-2024, post which he will be eligible for a 2-year extension before superannuation. We retain a BUY on the stock, with TP of Rs375/share (0.8x FY25E ABV)

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