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Initiated as 3rd PSB pick in March, INBK outperforms all PSU banks

Result Highlights

* Asset quality: Gross NPA additions amounted to Rs 24.6bn (annualized NPA addition ratio of 2.3%), while net deletions amounted to -Rs 1.11bn

* Margin picture: NIM at 3.20% was up 10bps/31bps QoQ/YoY, which could have been higher but for interest reversals of around Rs 4.0bn in 2QFY23

* Asset growth: Advances grew 3.0%/13.5% QoQ/YoY driven sequentially by Agri and Retail loans

* Opex control: Total opex grew 12%/3.9% QoQ/YoY, Employee Exp. grew 15.4%/3.7% QoQ/YoY and other expenses rose 6.9%/4.3% QoQ/YoY

* Fee income: Core fee income fell/rose -9.8%/53.2% QoQ/YoY, driven lower sequentially mainly due to lower Forex and PSLC Commission

Our view – Initiated as 3rd PSB pick in March, INBK outperforms all PSU banks

Decline in restructured book slippages is indicative of the book potentially not causing material asset quality pain: The Covid-19 restructured book and MSME book stood at Rs 160bn and Rs 22bn, respectively, with the latter overlapping with the former. The Covid-19 restructured book amounts to 3.7% of gross advances, which is a relatively material headline number. However, restructured book slippages declined from Rs 10.9bn to Rs 4.6bn on sequential basis. Furthermore, as much as 45% of the total slippages emerged from the agri book, with the even quarters known to be seasonally weak for this segment.

Management’s guidance of protecting NIM at 3% was flagged as conservative by themselves and we agree: While rising deposit cost will pressure NIM, ceteris paribus, NIM is a clear 30 bps above the 3% mark.In terms of implementing repo rate hikes on EBLR book, 50 bps still remain. Secondly, interest reversals during the quarter were elevated and should normalize lower. Thirdly, there is room for the CD ratio to inch up 100-200 bps.

Management has enhanced loan growth guidance by 200-300bps, while flagging potential variability in wholesale loan growth outcomes: While the bank will be able to grow RAM book at 12-13% in steady fashion, on corporate lending, the growth will depend on the margin available. Overall growth guidance is 12-13% plus or minus 2%. As recently as 1Q, the midpoint of the guidance handle was 10%.

We maintain ‘Buy’ rating on INBK with a revised price target of Rs 300: We initiated on INBK, in our report released in March, as only our 3rd PSB pick. Since then, INBK has returned 62%, significantly more than any other PSU Bank. We value the bank at 0.7x FY24 P/BV for an FY23E/24E/25E RoE profile of 9.9/12.8/13.9%.

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