Indian Bank: Preferred high beta play in Banking

CMP Rs178, Target Rs223, Upside 25.2%

Indian Bank differentiates itself from other public banks

Indian Bank having a major presence in southern India witnessed a loan CAGR of 22.7% over FY08-12. In the aforementioned period, the bank delivered superior RoAs (average 1.55% over FY08-12) underpinned by robust NIM (average 3.5%), lean operating structure and sanguine asset quality. Operating efficiency was driven by reduction in headcount, improving employee age pyramid and calibrated branch expansion. Asset quality though has deteriorated in recent quarters; however, displayed stress has been lower than peers.

After having shed majority of the short term corporate loans, Indian Bank’s loan growth is expected to accelerate H2 FY13 onwards. NIM would likely stabilize near 3.2% with the impact of lending rate cuts being offset by improvement in deposit franchise, more productive deployment of excess liquidity and re-pricing of term deposits. With the bank having no or low exposure to some publicly known stressed companies, slippages are less likely to surprise negatively in coming quarters. Even if PCR is sustained at the extant prudential level of 70%+, credit cost is estimated to be manageable. Therefore, RoA of the bank would likely settle at 1.2% over FY13-14; much better than projected sub-1% delivery for a host of PSU Banks. Another important differentiator for Indian Bank is its robust capitalization (Tier-1 capital at 11.8%) and higher government stake (80%).

Valuation attractive both on relative and absolute basis 

On YTD basis, Indian Bank has substantially underperformed peers and the Bankex. Consequently, it is one of the cheapest stocks amongst PSBs with valuation at 0.68x FY14 P/adj.BV. On absolute basis too, valuation is alluring in the light of impressive RoA/RoE delivery (average 1.2%/18% respectively). Based on 1-yr rolling fwd P/adj.BV, valuation is at 30% discount to 5-year mean. Amid improving appetite for mid-sized PSU banks, Indian Bank is our preferred bet. In our view, choosing a bank with relatively resilient earnings profile and robust capitalization is important. Indian Bank with stronger NIMs, higher PCR and sturdy capitalization provides much better comfort. Initiate coverage with a BUY recommendation and 9-month target price of Rs223.