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Result Highlights (See “Our View” for further elaboration)

? Asset quality: Gross NPA additions amounted to Rs 19.82bn (annualized NPA addition ratio of 1.6%), while recoveries and upgrades amounted to Rs 14.15bn

? Margin picture: Domestic NIM at 3.52% was down -9bps QoQ, due to cost of deposits rising more than yield on advances

? Asset growth: Gross advances grew 2.7%/12.4% QoQ/YoY, driven sequentially by Overseas loans and Agri Loans

? Opex control: Total opex grew 4.6%/19% QoQ/YoY, Employee Exp. grew 2.8%/22.5% QoQ/YoY and other expense rose 8.1%/13.3% QoQ/YoY

? Fee income: Core fee income rose 20%/11.3% QoQ/YoY, driven higher sequentially by growth in Transaction fees and Loan Processing Charges

Our view – Initiated as BUY in March 2022, INBK multiplies more than 2.5x but still has material upside

Management continues to make material standard asset provisions in what seems like groundwork for the ECL regime: Provisions were Rs 15.51bn, down by -10.9% QoQ and -24.7% YoY, translating to calculated annualised credit cost of 134bps. While provisions were lower sequentially, they include a Rs 5.74bn provision on standard assets. Management stated that buffer provisions are made in good times and have been made on a prudential basis i.e. not against specific assets. Management had guided for a credit cost of 125 bps on annualised basis whereas, the delivery has been 81 bps for 1H, if only NPA provisions are considered

A key factor protecting margin is the large MCLR book, which comprises 64% of total loan book: The MCLR book keeps coming for repricing and Rs 400bn is to reprice in the current quarter. A further Rs 460bn is to reprice in 4Q. Furthermore, the duration of the term liability book is 1.6 years and has been largely repriced. Notably, the rise in treasury yield has also aided margin. Management reiterated prior NIM guidance that NIM would be protected at the FY23 level of 3.41%

The bank has an approval for capital raise, which may also help it meet shareholding norms: The bank has approval for a capital raise of Rs 40bn, which it is working on and will carry out at the right time. The bank has approval for government holding till August 2024 i.e. to keep it above 75%, whereas it is 79.86% as of September 2023.

We maintain ‘BUY’ rating on INBK with a revised price target of Rs 540: We initiated on INBK with BUY, in our report released in March 2022, and as only our 3rd PSB pick, as our thumbs up to the PSU bank theme. Since then, INBK has returned 160%. We value the bank at 1.1x FY25 P/BV for an FY24E/25E/26E RoE profile of 13.6/14.8/15.6%.

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