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Growth and margin traction, with asset quality at an inflection point

We examined, carefully, the PSU banking space, taking a comprehensive look at as many as 8 key banks in this specific space. Upon our analysis, we found the thesis around Indian Bank (INBK) interesting and we initiate coverage with a BUY rating. We like INBK on account of the following reasons: (1) INBK has a superior growth profile compared with key PSU bank peers (2) INBK has several loan segments of healthy yield, whose share in loan book can inch up going forward, providing fillip to NIM (3) Headline asset quality metrics, admittedly, do not make for a good reading but we think asset quality is at an inflection point. We assign a BUY rating on INBK with a price target of Rs 188.

INBK has a superior growth profile compared with key PSU bank peers

INBK has displayed a relatively higher growth trajectory in recent years, growing at a 3- year growth CAGR of 6.8% over FY18-21. This growth CAGR has to be viewed in the context of the pandemic constraining generic loan growth. Importantly, it is the second highest CAGR in our 8-bank comparison universe, behind only SBI. Admittedly, growth has slowed to 3% YoY, as of December 2021 but we expect this to change soon. Growth outlook for INBK is reasonably good owing to (1) Improved corporate loan growth outlook (see note) and (2) Continued traction for non-wholesale / RAM (Retail Agri MSME) loans, which have grown 11% YoY, as of December 2021. Corporate loan growth outlook is boosted by a sanctioned pipeline worth ~Rs 600bn and management expectation of improvement in working capital utilisation, which is at ~70%. Agri loans are as much as 21% of overall loan book as of FY21, which is the second highest share in our comparison universe. Importantly, of the Rs 852bn Agri loans as of December 2021, Rs 681bn are crop loans, of which Rs 442bn are Jewel loans, which, regardless of nearterm hiccups, have a positive long-term outlook, especially in South India, where INBK has 32% of its branches. Capital is not a constraint for the bank, with CET1 ratio sitting at 11.4% as of December 2021, the second highest in our comparison universe.

INBK has several loan segments of healthy yield, whose share in loan book can inch up going forward, providing fillip to NIM

Housing loans, which occupy 13% of INBK’s overall loan book as of December 2021, are dominated by mortgages, which have a healthier yield profile compared with home loans. This book has grown 11% YoY and the bank expects further improvement. Agri loans, which occupy 22% of loan book, with the majority being gold-backed, also have reasonable yield. These loans have grown at 14% YoY and have a healthy outlook. Regarding other segments with attractive yield, auto loans and personal loans are currently 1.0% and 1.3% of loan book, respectively, but have started to grow fast sequentially, at 9.2% and 6.3%, respectively. Non-PSL gold loan book is 1.1% of total loan book and while, this book has de-grown 5.3% QoQ, its long-term outlook is attractive. INBK also has a SHG-based microfinance book, which is 2.2% of loan book and has grown 16% YoY. Whole bank NIM at 2.81% for FY21 is fourth best in our 8-bank comparison universe, with potential to improve going forward. Importantly, evolution of loan book mix is already playing out for INBK, with share of non-corporate loans having risen ~800 bps over June 2020-Dec 2021, the joint highest rise in our comparison universe

Headline asset quality metrics, admittedly, do not make for a good reading but we think asset quality is at an inflection point

GNPA ratio for INBK at 9.1% as of December 2021 is the 4th highest in our 8-bank comparison universe and a reflection of poor asset quality outcomes in the past for INBK. However, GNPA is well-provisioned with a PCR of 85.5% as of December 2021. Restructured book for INBK is elevated at 5.1%, the second highest in our comparison universe. However, INBK has been liberal in accommodating restructuring requests and management does not believe slippages from this book would be particularly material. Importantly, we see a sharp and significant turnaround in asset quality outcomes for INBK in the near term. Slippage ratio has been elevated in 9MFY22 but downwardsloping, with annualised slippage ratio of 4.6%, 4.5% and 3.1% in 1QFY22, 2QFY22 and 3QFY22, respectively. Of the Rs 87.1bn slippages in 9MFY22, Rs 34.2bn emerged from the corporate book. However, management has stated that there is no lumpy corporate stress accretion on the horizon and corporate SMA1+2 stands at just 44 bps now.

We assign a BUY rating on INBK with a price target of Rs 188

We value the bank at 0.5x FY23 P/BV for FY22/23/24E RoE profile of 8.7/11.7/12.6%

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