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Better growth, receding NPAs to driveup RoA

* Indian Bank reported healthy core-operating profitability (up 22% YoY), led by healthy margin/other income, albeit partly offset by higher staff costs. Bank expects staff cost to remain elevated in H2 due to provision towards new wage cycle (as negotiations will begin soon), which will be largely offset by better NII growth, lower LLP and tax benefit to driveup RoA.

* Loan growth was strong at 15% YoY/3% QoQ, led by faster growth in the RAM portfolio, whereas growth in Corporate was relatively moderate due to the bank’s conscious stance to focus on the risk-reward ratio. The bank has increased credit growth guidance to >12% and believes NIMs will improve in the absence of interest reversal, unlike in Q2 (~Rs4bn).

* Fresh slippages moderated to Rs25bn/2.8% of loans (vs 3.4% in Q1) which, coupled with higher recovery/w-offs, led to sharp reduction of 80bps QoQ to 7.3% in GNPA ratio. Management expects NPA ratios to trend down which, coupled with higher PCR @ 81%, should contain incremental LLP (<2%).

* We raise our earnings for FY23-25E by 6%-14% (respectively) and expect the bank to claw back RoA/RoE of 1%/15% by FY25E on the back of better growth/margins and lower LLP. We retain our BUY rating on the stock, with revised TP of Rs310/sh (earlier Rs210), based on 0.8 Sep-24E ABV vs our earlier 0.6x Jun-24E ABV.

* What we liked: Better growth and sharp improvement in asset quality. What we did not like: Slower deposit growth and relatively lower expansion in margins (10bps) vs peers (>20bps).

* Growth picks up and so do margins, with scope for further improvement: For Q2FY23, loan growth was strong at 15% YoY/3% QoQ. This was led by continued healthy growth in the RAM portfolio, while Corporate growth remains sluggish, given the bank’s stated stance to focus only on achieving a better-margin business. Management guides for healthy credit growth at >12% for FY23, with RAM being the key contributor and some seasonal acceleration in corporate lending. Deposits growth was relatively slower at 7% YoY/1% QoQ, but should improve in H2, given deposit rate hikes. NIMs improved by 10bps QoQ/30bps YoY to 3.2%, but was relatively moderate vs peers at >20bps mainly due to interest reversal of Rs4bn (@25bps impact).

* NPAs moderate, as does the RSA pool: Fresh slippages toned-down to Rs25bn/2.8% of loans, due to moderation in slippages from the RSA pool as well as from the Retail, MSME and Corporate segments. However, agri NPAs were elevated (which the bank attributes to seasonal factors) and should partly reverse in H2. This, coupled with better recoveries/upgrades and w-offs, led to 80bps reduction in GNPA ratio at 7.3%. The restructured pool also moderated, to Rs160bn/3.7% of loans, with retail share at 44% and MSME share at 43%. Management expects NPA ratios to trend down which, coupled with higher PCR @ 81%, should contain incremental LLP (<2%).

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