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Our view – Long-term bull market for select PSU banks still not over

Asset Quality – Slippages were well under control with management guiding for a decline in credit cost: Gross NPA additions amounted to Rs 13.84bn for 2QFY25, translating to calculated annualized slippage ratio of 1.02% for the quarter. Gross NPA additions had amounted to Rs 19.56bn during 1QFY25. Recoveries and upgrades amounted to Rs 10.85bn for 2QFY25, implying net NPA addition of Rs 2.99bn for the quarter. For FY25, the bank has a target of Rs 20bn for AUC recovery and Rs 70-80bn for total recovery including AUC recovery. Provisions were Rs 10.99bn, down by - 12.7% QoQ and -29.1% YoY, translating to calculated annualised credit cost of 83bps. The reported Credit cost was at 65bps for 2Q and 68bps for 1H (presumably specific credit cost only).

Net Interest Margin - Margin declined sequentially but only on account of penal charges rules: The whole bank NIM was at 3.39%, down -5bps QoQ and -7bps YoY. Due to regulatory changes, the penal interest is now accounted as penal charges and form part of other income, which had an adverse impact of -6bps on NIM.

Balance sheet growth – Loan growth was within the guided range: Gross advances grew 2.1%/11.9% QoQ/YoY, driven sequentially by MSME, Agri and some segments of Retail Loans. The guidance for advances is to grow in the range of 11-13%. The corporate loan growth outlook is reasonable given undisbursed term loans amounting to Rs 70bn, proposals in pipeline amounting to Rs 160-170bn and undisbursed working capital limit amounting to Rs 280bn. The guidance for deposits is to grow by 8-10%.

We maintain ‘BUY’ rating on INBK with a revised price target of Rs 710: We initiated 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 258%. We value the bank at 1.3x FY26 P/BV for an FY25/26/27E RoE profile of 16.6/16.7/16.7%.

Other Highlights (See “Our View” above for elaboration and insight)

* Opex control: Total cost to income ratio at 45.1% was up by 81/76bps QoQ/YoY and the Cost to assets was at 1.9% up by 13/4bps QoQ/YoY

* Fee income: Core fee income to average assets was at 0.4%, up 5bps QoQ but flat YoY.

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