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Decent quarter, earnings to gradually improve; retaining a Buy

Higher NIM and good fee income growth kept Indian Bank’s operating performance strong with its C/I ratio coming under 45%. However, higher credit costs (~2%) led to muted profitability, with the RoA at 0.7%. Slippages were elevated; however, higher write-offs led to improved GNPAs. Ahead, we expect slippages to moderate as most of the stress has already been recognized. Besides, we expect the bank to gain market share from its peer PSBs. We retain our positive view on it, at a TP of Rs290, valuing it at 0.6x P/ABV on its FY25e book.

Slippages remain elevated, GNPA declines. Q1 slippages were Rs24.6bn (2.4% of loans), of which ~45% stemmed from the agri book. Corporate, MSME and retail segments saw improvement in their asset quality. With the bulk of the accounts stressed by Covid’19-related restrictions already delinquent/restructured in the last few quarters, we expect slippages to moderate from Q3. The GNPA ratio fell 83bps q/q to 7.3% due to strong recoveries and higher write-offs. The bank’s overall collection efficiency (CE) slightly improved to ~95% in Q2 FY23, from 94% the quarter prior.

Loan growth to pick up. The bank’s loan book was Rs4.1trn (up ~14.3% y/y). The corporate portfolio (~36% of loans) shrank 7% y/y. This was in line with management’s strategy of focusing on granular retail lending. With a cleaner balance sheet, adequate capital and a strong deposit base, we expect a pick-up in credit growth from next quarter; accordingly, we model low-teen growth for FY23/24.

Valuation. Our Nov’23 target of Rs290 is based on the two-stage DDM model. This implies ~0.6x P/ABV multiples on its FY25e book. Risks: Lumpy slippages from the corporate book; lower-than-expected loan growth.

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