IGI Logo

Growth set to improve, but asset quality to be key monitorable

* Among the PSBs that were part of the recent consolidation, Indian Bank benefited the most from its merger with Allahabad Bank in terms of liability profile (CASA >40%). Its proactive tech integration ensured a smooth transition, unlike BOB. We believe Indian Bank is one of the best mid-cap PSBs with strong capital ratios (CET 1 ~11.7%) across cycles and ability to deliver relatively stronger return ratios (RoA/RoE at 0.8%/13%) as growth accelerates.

* With strong capital buffers (CET1@11.7%) in place and overall NPAs trending down, it is gearing up to accelerate growth (~8% in FY22E; >10% in FY23E). This should be mainly driven by healthy traction in the RAM segment and back-end support from mid-corporates. Thus, better growth/LDR and lower interest reversals should support margins.

* Asset quality performance has been a mixed bag, with NPAs declining to 9.6% from a peak of 12.7% post-merger, but restructuring remains slightly high at 5% of loans. Management believes that the bulk of retail (42%) restructuring is toward mortgages and expects a lower relapse rate. The impact of RBI’s norms on upgrading NPAs, subject to clearance of all dues, could have a limited impact in Q3.

* Factoring in the impact of rising G-sec yields on treasury and a slightly higher tax rate from FY23E, we cut the bank’s FY23-24E earnings by 5-6% and still expect it to deliver healthy RoA/RoE of 0.8%/13% by FY24E. Valuations remain reasonable post the recent marketwide correction. Hence, we retain Buy with a revised TP of Rs220 (0.7x Dec’23E ABV) from earlier Rs235. Key risks: slow growth/higher NPAs in the SME segment due to a fresh Covid wave and delay in macro pick-up.

Growth set to improve, and so should margins: Overall loan growth has been subdued at 6% yoy, mainly due to the corporate drag stemming from the underutilization of capacities and deleveraging. However, RAM growth was reasonable at 13% yoy, including retail at 14% yoy and agri at 16% yoy. Management believes consistent momentum in RAM will do the heavylifting in terms of delivering 8% overall credit growth in FY22, with some back-end support from mid-corporate. It sees opportunities in sectors such as textiles, petrochemical, chemical and steel. The bank has also signed a co-lending arrangement with NBFCs like Indiabulls Housing and IIFL, but it is yet to see meaningful traction. The bank would be open to more partnerships on the lending side. The bank expects NIM to remain healthy at around 2.8-3%, led by improving growth/LDR and lower interest reversals as lumpy asset quality is largely behind.

Asset quality remains a mixed bag: The bank has already recognized Srei Group (inherited from Allahabad Bank) as an NPA with a 50% provision cover, while Future Retail (Rs11bn) is already part of the restructured pool. The bank expects few lumpy resolutions (including ILFS), transfer of NPAs to NARCL and higher write-offs given healthy provisioning cover to keep NPAs in check. The restructured book remains elevated at Rs192bn (5% of loans), mainly from retail (42%) and MSME (37%), but management expects limited slippages from the pool based on repayment trends and subject to no severe third Covid wave. The SMA 2 pool too has moderated to 1.5% from 2.6% in Q1, indicating a moderating stress pool.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer