HDFC Securities’ take on Indian Bank:
Indian Bank is much better placed as it does not need much support from the government. The quality of the bank’s assets gives a better picture compared to other competitors.
No loss of one rupee in the last ten years
It is noteworthy that despite the credit crunch that has plagued the sector for a long time, the Indian bank has not yet reported a penny loss. Still, it has paid out 7 dividends in the past ten years. It also has a diversified portfolio and has an active and increased focus on the RAM segment or retail agriculture and the MSME segment, which will increase risk diversification, increased revenues and improved margins.
Prudent attitude coupled with high corporate portfolio:
However, the brokerage is concerned about the bank’s overposition with regard to its high corporate portfolio. It has a high BB and a lower book value and has a high exposure to sectors such as infrastructure, NBFC etc. Even management is cautious about retail and MSME segments for the coming quarters. However, a cheap valuation coupled with a strong liability franchise and low cost of funds gives us long-term comfort. It is a play on the gradual recovery of the Indian economy, the brokerage firm adds.
Banking sector may be eligible for revaluation in case of space acquisitions given privatization buzz
The latest NARCL guarantee will be especially positive for large PSBs. “A faster settlement by the IBC could also aid recovery and reduce slippage in the future. Privatization buzz has kept the PSU banking sector in the spotlight and we believe the takeover of some PSU banks by the prestigious companies/institutions – local or foreign – at a good valuation, the sector can revalue”.
Rating & Recommendation:
“We expect the Indian bank to grow its loan portfolio at 9% CAGR, while NII and net profit are expected to grow at 7.5% and 39.5% respectively (due to a lower base) CAGR over FY21-23E. ROAA will is estimated to improve to 0.8% in FY23E from the current 0.6% in FY21 and RoE could rise to 12.4% from 9.9% in FY21 We expect a healthy recovery and upgrades in the next two years. The asset quality trend of corporates and SMEs would be the key monitorables Most concerns arising from ongoing write-downs from restructured/SMA accounts are already in the price We have assumed higher recoveries and lower slippages going forward. may also start to stabilize around the 3% level, we believe investors can buy Indian banks at an LTP of Rs.139 (0.46xFY23E ABV) and add more at Rs.121 (0.4xFY23E ABV) for the fair value of Rs.158 (0.52xFY23E ABV) and for the fair value of Rs.170.5 (0.56xFY23E ABV) over the next two quarters,” the brokerage adds.
Long-term triggers that could push the stock higher:
The capital adequacy ratio at the bank stood at 11.6 percent on June 21 and tier I at 15.92 percent. In the just past quarter, the bank raised an amount of Rs through QIP. 1650 crore in which shares were issued for Rs. 142.15 per share. . The bank had also raised additional Tier 1 bonds and Tier 2 bonds of Rs.2,000 Cr each in FY21. Any quality deterioration of the assets can be easily absorbed by the bank.
Merger will be completed this year itself
The bank is in the process of completing the integration with Allahabad Bank and should also generate synergies in the long term. Furthermore, the merger has resulted in increased balance sheet size and optimized capital use, increased geographic reach leading to deeper penetration, sharing and scale of product capabilities and platforms with increased cross-selling between segments, increased operational and process efficiencies through economies of scale and elimination of duplication .
Improved low cost financing base:
Management believes that they are able to maintain a relatively low-cost funding base compared to other competitors by leveraging strengths, expanding the base of savings and current deposits, conducting government activities and free float generated by increasing transaction services. The cost of deposits and the cost of funds have fallen continuously. This low-cost fund helps the bank create an edge over other private players, the report adds.
NARCL warranty as well as SC order to invoke personal warranty
NARCL security and the SC guideline to invoke personal guarantees in the event of company default will also aid in faster recoveries.
The PSB stock is taken from HDFC Securities’ brokerage report and is not a recommendation to take a position in the stock.