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Indian Bank reported a healthy beat on PAT at Rs17bn/1% RoA (Emkay: Rs16bn), mainly on steady albeit healthy margins (3.56%) and contained opex, and partly offset by normalized tax rate, as the benefit of accumulated losses wanes. Credit growth was moderate at 14% YoY/2% QoQ, as Bank retains focus on ‘profitable’ growth instead of chasing just growth. Bank expects margin to remain stable & healthy, supported by residual MCLR repricing. Per its strategy, Bank continues to scale-up its MCLR book (64% vs 59% in 4Q), to limit impact on margin when the rate-reversal cycle begins. Given higher share of agri gold loans, Bank has potential to scale-up PSLC fees. Bank now has one of the lowest NNPAs among PSBs at 0.7%; thus, incremental LLP should decelerate, leading to better RoA. Building-in the 1Q beat and better margin/LLP/fees, we raise FY24-26E earnings by 5-9% and expect strong RoA/RoE of 0.9-1.1%/15-16%; retain BUY with revised TP of Rs425, valuing Bank at 0.9x its Jun-25E ABV. Indian Bank remains our preferred pick in PSBs.

Calibrated growth with continued focus on margins

Indian Bank continued to report calibrated credit growth, at 14% YoY/2% QoQ, mainly led by the retail and Agri portfolios, while growth in Corporate was moderate and MSME witnessed marginal de-growth. Within Retail, mortgage continues to dominate the portfolio, while VF too has now emerged as a growth driver. Also, deposit growth was moderate at 6% YoY, as the bank continues to consume internal liquidity. CASA witnessed sequential de-growth, leading to decline in CASA ratio to 39.3% which, coupled with the rising deposit cost, led to a 31bps QoQ increase in CoF. That said, better loan yields, aided by MCLR repricing and investment yields, led to a stable & healthy NIM at 3.56%. The bank expects margins to stay steady stable & robust, bolstered by residual MCLR repricing. Per its strategy, the bank continues to scale-up the MCLR book (64% vs 59% in 4Q), to limit the impact on margins when the rate-reversal cycle begins.

One of the lowest NNPAs among PSBs

Bank’s fresh slippages were lower than expected at Rs19bn/1.9%, mainly due to lower agri slippages and lower stress flow from the restructured pool. This, coupled with strong recoveries/upgrades and accelerated w-offs, led to a 48bps QoQ reduction in GNPA ratio to 5.5%. The bank carries a strong PCR at 88%, thus resulting in one of the lowest NNPA ratios among PSBs, at 0.7%. Bank’s restructured pool remains elevated at 2.2%, which mainly comprises of retail loans including mortgages with relatively lower PD. Given the strong PCR, the bank expects incremental provisioning requirements to come off in FY24 which should support profitability.

Preferred pick among PSBs

Factoring-in the 1Q beat and the better margin/LLP/fees, we raise our FY24-26E earnings by 5-9% and expect strong RoA/RoE of 0.9-1.1%/15-16%. We retain BUY on the stock, with revised TP of Rs425/share, valuing the bank at 0.9x its Jun-25E ABV. Indian Bank remains our preferred pick in the PSB space. The bank remains well capitalized, with CET 1 at 12.3%, but it has taken enabling approval to reduce promoter stake below 75%, to meet SEBI guidelines. Key risks: Macro-dislocation hurting growth/asset-quality improvement trajectory and merger of any other PSB, given the bank’s otherwise strong fundamentals.

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