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NII, PPoP in line; earnings outlook buoyant

Guides for controlled credit cost

*  Indian Bank (INBK) reported 1QFY25 PAT of INR24b (41% YoY, 9% beat), driven by lower provisions (as the bank reversed INR970m on account of the sale of stressed assets in 1Q).

*  NII growth was healthy at 8.3% YoY (in line). Margin was broadly flat with a 1bp QoQ increase to 3.53%.

*  Net advances grew 14% YoY/1.2% QoQ, while deposits rose 9.6% YoY but fell 1% QoQ. Consequently, the C/D ratio increased by 162bp QoQ to 76.5%. The CASA ratio moderated 174bp QoQ to 39%.

*  Fresh slippages increased to INR19.6b, mainly due to seasonality. Healthy recoveries/upgrades resulted in 18bp/4bp QoQ improvements in GNPA/NNPA ratios to 3.8%/0.4%. SMA book stood at 0.5% of loans during the quarter.

*  We raise our earnings estimates by 4% for FY25 and expect the bank to deliver RoA/RoE of 1.3%/17.7%. Reiterate BUY with a revised TP of INR670 (premised on 1.2x FY26E BV

Operational performance in line; guides for NIM at ~3.4-3.5%

*  PAT growth was healthy at 41% YoY/7% QoQ to INR24b (9% beat), led by lower provisions (as the bank reversed INR970m on account of the sale of stressed assets in 1Q).

*  NII grew 8.3% YoY/2.7% QoQ to INR62b (in line). Margin was broadly flat, with a 1bp QoQ increase to 3.53% as funding costs remained under control.

*  Other income grew 11.5% YoY/declined 16% QoQ to INR19.1b (in line), resulting in 9% YoY growth in total revenue (in line). Treasury income stood at INR2.6b vs. INR1.9b in 4QFY24.

*  Opex grew 9% YoY/declined 10% QoQ (3% lower than MOFSLe). As a result, the C/I ratio moderated 368bp QoQ to 44.3%. PPoP grew 9% YoY (in line) to INR45b in 1QFY25.

*  Gross advances grew 12.5% YoY (up 1% QoQ) to ~INR5.4t, led by Retail and Agri. Within Retail, housing and vehicle maintained healthy growth momentum. Deposit growth was modest at 9.6% YoY (down 1% QoQ). CASA ratio thus declined 174bp QoQ to 39%. C/D ratio increased by 162bp QoQ to 76.5%. The management expects to maintain CD ratio at around 80%.

*  Fresh slippages increased to INR19.6b vs. INR12.7b in 4QFY24. Healthy recoveries/upgrades resulted in 18bp/4bp QoQ improvements in GNPA/NNPA to 3.8%/0.4%. Specific PCR remained strong at ~90%.

*  SMA book stood at 0.5% of loans during the quarter. The total restructured portfolio declined to 1.5% of loans (vs. ~1.7% in 4QFY24).

Highlights from the management commentary

*  The guidelines for ECL are still in draft form and their impact is expected to be minimal. The bank will also pass on charges to customers. The ECL impact is spread over a five-year period, resulting in a minimal effect.

*  Deposits are expected to grow by 8-10%. Advances are projected to grow by 11- 13%.

*  61% of the loan book is based on MCLR, with an external T-bill exposure of INR10b. Of the MCLR loans, 80% are linked to one-year MCLR.

*  NIM guidance is 3.4% (±10 bp), with the bank aiming to exceed this guidance.

Valuation and view

INBK reported a healthy quarter, with earnings led by lower provisions and controlled opex. Loan growth remained healthy, while deposit growth was modest, which led to an increase in the CD ratio. INBK has gradually raised its MCLR-linked loans, which should provide cushion to its 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. Slippages were higher primarily due to seasonality, heatwaves, and the elections. However, the management has successfully recovered INR3.12b of these slippages so far and anticipates further recoveries in 2Q. Despite this, asset quality ratios have improved, with the bank maintaining a best-in-class coverage ratio, which, along with a low SMA book, provided comfort on incremental credit costs. We raise our earnings estimates by 4% for FY25 and expect the bank to deliver RoA/RoE of 1.3%/17.7%. Reiterate BUY with a revised TP of INR670 (premised on 1.2x FY26E BV).

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