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Well managed PSB; profitability to enhance
Indian Bank Ltd. (IBL),
mid-sized PSU bank, has been reporting stable set of number since the assets quality review (ARQ) period while most of the PSBs are still struggling with losses and capital constrains issues. Considering business growth & profitability, operating efficiency and assets quality, IBL appears to be well managed PSU bank. While the assets quality deteriorated over the past few quarters due to high slippage from the corporate book (IL&FS also weighed on performance), reducing stress book is providing comfort on this front. While the assets quality is likely to improve in FY20, strong capital position enable it to capture growth opportunity essentially when the competition has narrowed due NBFCs liquidity crisis and weak capital position of PSBs. Given its peer-best assetquality ratios, improving return ratios and strong capital position, RoE is likely to improve to ~12% by FY21E from 7.1% in FY18. We assign ‘Buy’ rating to the stock with the potential price of Rs330 valuing business at P/ABV (x) of 1.1 to FY21E adj. BVPS of Rs309.
NPA cycle peaked; best performer among PSBs:
IBL maintained stable and one of lowest GNPA/NNPA ratio among PSBs at 7.5%/4.4%. Meanwhile it has seen some deterioration in assets quality over the past one year owing to higher slippage from the corporate book. Slippage rate was maintained over 1% over the past few quarters due to build up stress in the corporate book. Out of Rs15.9 bn of restructured standard assets, corporate book accounted for 89% by Dec’31 2018. Corporate book is mainly dominated by infrastructure loans (14%) which includes power (5.3%) among others and metal (2.8%).
Assets quality position was also dented by recent IL&FS crises leading to rise in GNPA to 7.5%, highest level of NPA in the last seven quarters. IBL’s total exposure to IL&FS group was Rs17.2 bn out of which Rs9.5 was recognized as NPA in Q3FY19 while the remaining amount of Rs7.7 bn is standard in the book. The bank has provided Rs2.5 bn against IL&FS exposure (covering ~15%).
IBL is likely to recognize stress or Rs4-4.5 bn from IL&FS a/c in coming quarter, while RKM Power (Rs4bn) remains standard as per court order. While slippage is likely to remain high in coming quarter, we expect normalization in FY20 due to decline in buildup of stress assets. Retail, agriculture and MSME (RAM), accounts for around 58.7% of gross advances, are performing good while the stress in the corporate has reduced due to aggressive recognition.
Restructured standard reduced to 0.9% of advances in Q3FY19 v/s 2.7% in the same quarter of previous fiscal. Exposure to stressed sectors like infrastructure and metal reduced to 16.8% by Q3FY19 v/s 20.1% in Q3FY18. Around 20% or above of the stressed sectors already recognized as GNPA with GNPA to metal exposure stood at 40% and GNPA/coal mining stood at 75%. SMA2 a/c stood at Rs45 bn (0.3% of advances, Rs37 bn in Q2FY19) out of this Rs15.7 bn is corporate and Rs13.9 bn is MSME. As per the mgmt, historical trend showed that the maximum of 10â15% has slipped to NPA from these accounts.
Business growth momentum to continue
Advances book grew by 20-22% YoY in FY18/H1FY19 under the aegis of erstwhile MD. The new MD guided for calibrated growth trajectory with the focus remained on profitability v/s growth. As per the bank, corporate demand still likely to expand at slower pace, while the RAM, high yielding segment with a share of 59% in book, would continue to grow at strong pace driving overall advances growth.
The bank has strong liability franchise with the branch network of ~2830 helping it to garner deposits for funding loans. C/D ratio at 75.8% by Q3FY19 is also stood at comfortable level as compared to private peers with C/D ratio hovering at ~85% or above. While the new mgmt focus to remain at balance sheet consolidation, IBL’s advance is likely to grow at ~16.5% CAGR during FY18-FY21E. Easing competitive scenario like NBFCs liquidity crises, capital constraints for PSBs would also provide boost to the credit growth.
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