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Indian Bank 3QFY2012 performance highlights and results update

Contributed by Angel Broking

For 3QFY2012, Indian Bank reported net profit growth of 7.0% yoy (up 12.2% qoq) to Rs.526cr, above our estimate, primarily due to reversal of Rs.52cr of tax liability during the quarter. We recommend Neutral on the stock.

NIM declines sequentially; NPA levels rise qoq: Advances for the bank grew by 1.8% qoq (18.2% yoy) and deposits grew by 2.4% qoq (17.8% yoy). CASA deposits growth was relatively healthy at 3.8% qoq (11.1% yoy), leading to a 41bp sequential rise in CASA ratio to 30.2%. CASA deposit growth was mainly on account of healthy traction in saving account deposits, which grew by 6.1% qoq. The bank’s yield on advances declined by 41bp qoq to 11.7%, while cost of deposits increased by 26bp qoq to 6.9%, leading to an 18bp qoq fall in reported NIM to 3.6%. The bank witnessed a sequential decline of 16.5% in fee income during 3QFY2012 to Rs.235cr. Treasury income also declined by 12.5% qoq to Rs.18cr, while recoveries were also low for 3QFY2012, declining by 29.9% qoq to Rs.28cr. NPA levels of the bank rose sequentially, with absolute gross NPAs increasing by 13.6% qoq and net NPA increasing by 16.7% qoq. Provision coverage ratio of the bank declined by 285bp qoq to 76.5% compared to 79.4% in 2QFY2012 and 84.1% in 1QFY2012. Slippage levels, which had risen sharply in 2QFY2012 to Rs.380cr on account of switchover to system-based NPA recognition and due to a few chunky accounts slipping into NPA, declined to Rs.293cr (slippage ratio of 1.6%). As of 3QFY2012, the bank’s restructured book stood at Rs.5,573cr. The bank restructured accounts worth Rs.421cr during 3QFY2012, of which ~Rs.300cr was on account of restructuring of GTL (also led to NPV hit of Rs.36cr in the P&L).

Outlook and valuation: At the CMP, the stock is trading at 1.0x compared to its five-year range of 0.8x-1.3x. The current valuations of 1.0x are relatively high compared to peers, which are trading at 0.6-0.8x FY2013E ABV. As these relatively high valuations are primarily attributable to the bank’s high NIM, which may not sustain in the medium term, we believe the risk-return trade-off in case of Indian Bank is less favorable. Hence, we recommend Neutral on the stock.