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NII, PPoP in line; asset quality remains buoyant

Asset quality continues to improve

* Indian Bank (INBK) reported 2QFY25 PAT of INR27.06b (36% YoY, 6% beat), driven by lower provisions and higher other income.

* NII grew 7.9% YoY (in line) to INR61.9b. Domestic NIM moderated 4bp QoQ to 3.49%.

* Net advances grew 13.2% YoY/2.3% QoQ, while deposits grew 8.2% YoY/1.8% QoQ. Consequently, the C/D ratio increased 43bp QoQ to 76.9%. The CASA ratio stood at 38.9%.

* Fresh slippages declined to INR13.8b vs. INR19.6b in 1QFY25. GNPA/NNPA ratios improved by 29bp/12bp QoQ to 3.48%/0.27%. PCR rose to 92.5%.

* We fine tune our earnings estimates and expect the bank to deliver RoA/RoE of 1.2%/17.3%. Reiterate BUY with a revised TP of INR650 (1.2x FY26E ABV).

Operational performance in line; NIM moderates 4bp QoQ

* PAT growth was healthy at 36% YoY/12.6% QoQ to INR27.1b (6% beat), led by lower provisions and higher other income. In 1HFY25, earnings grew 38% YoY to INR51.1b (2HFY25E at INR53b, implying 21% YoY growth).

* NII grew 7.9% YoY (in line) to INR61.9b. Domestic NIMs moderated 4bp QoQ to 3.49%. The management guides for NIM of 3.4% for FY25.

* Other income grew 21.5% YoY/27% QoQ to INR24.2b (18% beat), resulting in 11.4% YoY growth in total revenue (4% beat). Treasury income stood at INR3.3b vs. INR2.6b in 1QFY25.

* Opex grew 13.3% YoY/8.5% QoQ (5% higher than MOFSLe). As a result, the C/I ratio increased to 45% from 44.3% in 1QFY25. PPoP grew 9.9% YoY (in line) to INR47.3b in 2QFY25.

* Gross advances grew 11.9% YoY (up 2% QoQ) to ~INR5.5t, led by Retail and Agri. Within Retail, housing and vehicle maintained healthy growth trends. Deposit growth was modest at 8.2% YoY (1.8% QoQ). The CASA ratio stood at 38.9%. The C/D ratio increased 43bp QoQ to 76.9%.

* Fresh slippages declined to INR13.8b vs. INR19.6b in 1QFY25. GNPA/NNPA ratios continued to improve by 29bp/12bp QoQ to 3.48%/0.27%. PCR increased to 92.5%.

* SMA book stood at 0.9% of loans during the quarter. Restructured portfolio declined to 1.3% of loans (vs. ~1.5% in 1QFY25).

Highlights from the management commentary

* SMA 1 increased due to one INR22b account, which was earlier in SMA-2 and has now been transferred to SMA-1 as it is a government-guaranteed account.

* INBK maintains growth guidance for advances at 11-13% and deposits at 8-10%.

* About 58% of the loan book is based on MCLR, 36% is repo linked, 5% is fixed. The bank has total standard provisions of INR85b.

* The bank expects lower recovery this year at ~INR70b.

Valuation and view

INBK reported a healthy quarter, with earnings led by lower provisions and higher other income. Loan growth remained healthy, while deposit growth was modest, which led to a slight increase in the CD ratio. INBK has ~58% of its book linked to MCLR, which should provide cushion to margins, particularly as the rate cycle turns. The management expects margins at ~3.4% in FY25 and the growth trend to remain steady. It will continue to focus on profitable growth. SMA 1 increased due to one account, which was transferred from SMA-2. Asset quality ratios have improved, with the bank maintaining a best-in-class coverage ratio with lower slippages, providing comfort on incremental credit costs. We fine tune our earnings estimates and expect the bank to deliver RoA/RoE of 1.2%/17.3%. Reiterate BUY with a revised TP of INR650 (premised on 1.2x FY26E ABV).

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