IGI Logo

Gradual improvement in RoA to drive valuation…

About the stock: Indian Bank is one of the largest and among the better performing PSU banks in India with a total business of over | 11 lakh crore

• Pan-India presence with strong branch network of 5787 domestic branches

• Diversified loan mix with RAM (retail/agri/MSME) forming ~60% to book

Investment Rationale:

• Focus on RAM segment to aid growth as well as margins: Given increasing competitive intensity on liabilities, accretion of term deposits is expected to remain elevated. Further, repricing of deposit rates is seen to result in increase in cost of funds (up 45 bps in Q4FY23). However, focus on RAM segment (Retail, Agri and MSME) segment, gradual increase in proportion of higher yielding segment (personal & gold loans within retail and micro loans in MSME segment) and repricing of assets (40% of the loan book is linked to one-year MCLR) is expected to keep margins steady. While growth in retail category is seen to aid yields, disbursements in corporate loans is seen to aid business growth. Management is targeting advance growth at 10-12% and deposit growth at 8-10% in FY24E.

• Steady opex, moderation in slippages to limit credit cost thereby aiding RoA: Moderation in slippages to limit impact on reversals on NIMs, while healthy provision coverage at 85.65% (as of March 2023), improving rating profile of borrowers (90% of loans rated BBB and above) and recovery from written off assets is seen to result in decline in GNPA at <5%. Investment in branch expansion and technology (target spend of |500-600 crore in FY24E) to support growth and efficiency. Thus, fee based income growth aligning balance sheet, marginal treasury gains led by decline in g-sec and continued steady operational efficiency is seen to drive RoA gradually to 0.8-0.9% in FY24-25E.

Rating and Target Price

• Growth with selective approach and focus on sustained margins & asset quality is seen to gradually drive improvement in RoA. Improvement in fee based income & efficiency remain additional levers aiding earnings

• Post dismissal performance in FY15-20, led by moderation in business growth and erosion of profitability due to asset quality concerns, revival in growth parameters as well as earnings is expected to drive valuation.

• Currently, the stock is trading at ~0.8x FY25E ABV. Assigning BUY rating to the stock, we value INDIBA at | 410 i.e. ~1x FY25E ABV factoring ~12% CAGR growth in advances and expected RoA at ~0.9% in 24-25E

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://secure.icicidirect.com/Content/StaticData/Disclaimer.html
SEBI Registration number INZ000183631

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