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Healthy NIMs, contained provisions drive earnings beat

* Indian Bank reported a strong beat on PAT at Rs5.1bn vs. estimate of Rs1.8bn, mainly led by better margins and contained provisions. It has made additional Covid-19-related provisions in Q3, with the cumulative provision buffer now at Rs15bn (42bps of loans).

* Headline GNPA ratio improved 85bps qoq to 9% due to the Supreme Court’s stay on NPA tagging, while proforma GNPA is higher at 10.4%. Overall SMA 2 pool is higher at Rs104bn (2.9% of loans), mainly including corporates, and thus needs to be closely monitored.

* Overall restructuring requests have been lower than expected, with the recent RBI-initiated restructuring pool at Rs55.8bn (1.6% of loans), mainly from corporate, while for SME/retail, it has been relatively moderate. The bank has a reasonable CET-1 ratio of 10.4%, but it has taken the approval to raise equity capital to the tune of Rs40bn for growth and meeting the SEBI’s guideline to reduce promoter stake below 75% from 88%.

* We like Indian Bank in the mid-cap PSB space with merger-related concerns easing but we would be watching near-term asset quality behavior given the higher SMA pool. Retain Hold/EW in EAP, with a TP of Rs100 (0.4x FY23E ABV).

Pace of growth picks up with improvement in margins: Overall loan growth on a merged basis improved 7% yoy/10% qoq to Rs3.6tn, driven primarily by growth in the RAM sector (12% yoy), while corporate (including overseas) growth remains sluggish at 3% yoy. The bank has disbursed Rs52bn till now under the ECLGS scheme, due to which SME loans grew 6% qoq. The CASA ratio remains healthy at 41% (after the merger with Allahabad Bank). This, coupled with the slight improvement in LDR, led to a 7bps qoq uptick in NIM to 3.1%. That said, we believe NIMs will moderate a bit in Q4 due to interest reversal on actual NPA formation. The bank expects merger synergies to kick in from H2FY22 and is taking up this opportunity to reinvent its business model and centralize business operations, especially in the SME/Retail business to reduce TAT. Management expects traction in corporate to improve gradually with private capex picking up pace.

Asset quality remains the key near-term monitorable: Reported GNPA improved 85bps qoq to 9% due to the continued SC stay on NPA tagging, while proforma GNPA ratio would have been at 10.4% without any w-offs. Unrecognized proforma slippages for Q2/Q3 were Rs50.9bn (1.3% of loans). Overall restructuring requests have been lower than expected, with the recent RBI-initiated restructuring pool at Rs55.8bn (1.6% of loans), mainly from corporate, while for SME/retail, it has been relatively moderate. With additional provisions in Q3 of Rs8.8bn, the cumulative buffer stands at Rs15bn, or 42bps of loans, as of Dec’20.

Outlook and valuations: We believe IndianBank has managed the merger-related integration process reasonably well. It has also benefited from a healthy CASA pool from Allahabad Bank, which should lead to better margins in the long run. We expect the bank’s RoE to improve to 9% by FY23 from a low of 4% in FY20 post-merger. We retain Hold/EW in EAP with a TP of Rs100 (0.4x FY23E ABV). Key risk to our call: higher-than-expected NPA formation in the SME/corporate book.

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