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Asset quality continues to improve

-      Indian Bank (INBK) reported a PAT beat at INR21.2b (up 52% YoY/ 6.6% QoQ; 9% beat on MOFSLe), amid lower-than-expected provisions (as the bank reversed excess provisions on account of a sale of stressed loans). NII grew 5.7% YoY (in line). Margin contracted slightly by 3bp QoQ to 3.49%.

-      Gross loan growth was healthy at 13% YoY/4% QoQ, while deposits grew 9.6% YoY/ 2.1% QoQ. CD ratio increased marginally to 77.9%, while the bank continued to focus on profitable growth.

-      Fresh slippages were under control at INR16.8b. Healthy reductions led to a 50bp/7bp QoQ decline in GNPA/NNPA to 4.5%/0.5%. SMA book stood at 0.6% of loans during the quarter.

-      We marginally tweak our earnings estimates with +3.6%/-1.4% change in FY24/25E EPS. We expect the bank to deliver an RoA/RoE of 1.2%/ 16.7%. We reiterate our BUY rating with a TP of INR525.

Revenue growth steady; wage provisions lead to an increased opex

-      INBK’s PAT growth was healthy at 52% YoY/6.6% QoQ to INR21.2b, led by lower provisions due to provisioning reversals on the sale of stressed loans.

-      NII grew 6% YoY/1.3% QoQ to INR58b (in line). NIM declined slightly by 3bp QoQ to 3.49% (better than expected), and management guided to maintain NIM at ~3.41%.

-      Other income grew 11% YoY to INR19b (in line), led by a steady fee income of INR8.5b (21% YoY/5.8% QoQ) and healthy treasury gains.

-      Opex grew 15% YoY/5.5% QoQ, as INBK provided for an extra wage-related provisioning that totaled to INR5.6b in 3Q24. As a result, C/I ratio inched up to 46.9% from 44.4% in 2QFY24.

-      Gross advances grew 13% YoY (up 4% QoQ) to ~INR5.1t, led by a broad-based growth across all segments such as Retail, Agri, Corporate, and International advances (up 5% QoQ). Within Retail, Housing and Vehicle grew at a healthy pace. Deposits grew at a slower pace at 10% YoY/2.1% QoQ. CASA ratio declined marginally to 39.7% for the quarter.

-      GNPA/NNPA ratios declined 50bp/7bp QoQ to 4.5%/0.5%, as slippages remained under control, while recoveries & write-offs continued to be healthy. PCR was healthy at ~88.7%. Provisions declined 13% QoQ to INR13.5b (12% lower than MOFSLe).

-      SMA 1/SMA 2 book stood at 0.56% in 3QFY24 vs. 0.64% in 2QFY24. Total restructured portfolio declined to 1.9% of loans (vs. ~2.1% in 2QFY24).

Highlights from the management commentary

-      Management guided for 3.41% +/- 10bp of NIM (supported by MCLR repricing); the NIM is still above the guidance.

-      The bank’s 57bp of capital was hit by an increase in risk weights.

-      For wage provisioning increase, the bank will incur an additional average expense of INR750m per month i.e. INR2.2b per quarter.

-      The bank has been focusing on the CASA deposits to manage the costs. The current environment for the deposits remains a challenge, but the INBK is taking various steps to sustain healthy deposit growth.

Valuation and view

INBK reported a decent quarter with earnings beat led by a healthy revenue growth and lower provisions. Loan growth remained largely broad-based with healthy trends across all business segments (particularly in Retail, Agri, and Corporate segments), while healthy other income provided further support to the revenue trajectory. INBK has gradually raised its MCLR-linked loans to 61%, which should provide cushion to margins, especially when the interest rate cycles start reversing. The bank expects the growth trend to remain steady and it will continue to focus on profitable growth. Asset quality ratios improved further as the bank maintained best-in-class coverage ratio, which, along with low SMA book, provides comfort on incremental credit cost. We estimate INBK to deliver an FY25 RoA/RoE of 1.2%/ 16.7%. Reiterate BUY with a revised TP of INR525 (based on 1.1x Sep’25E ABV).

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