QS - Indian Bank - Initiating Coverage

Indian Bank January 14, 2015

Initiating Coverage Industry CMP (Rs) FY17E Target Price (Rs) 52 Week H/L (Rs) Volumes (BSE+NSE)* Shares O/S (mn) Market Cap (Rs mn) Free Float (%) Bloomberg Reuters *Three month average

PSU Bank 214 300 224 / 86 284860 464.9 99408.0 18.5 INBK IN INBA.BO

Share Holding Pattern (31/12/2014) Shares Holding Particulars (mn) (%) Promoters FIIs DIIs Others Total Source : BSE

378.9 28.6 39.1 18.3 464.9

81.5 6.2 8.4 3.9 100.0

Financial Highlights (Rs bn) Op. Income NIM (%) PAT PAT Growth (%) EPS (Rs) ABV (Rs) P/ABV (x) RoAE (%) RoAA (%)

FY15E 61.7 2.7 12.0 3.3 25.8 200.5 1.1 8.4 0.6

Analyst: Rati J. Pandit, CFA +91- 22- 40287021 [email protected]

FY16E 72.8 2.8 17.2 43.6 37.0 234.0 0.9 11.2 0.8

FY17E 87.6 3.0 24.3 41.6 52.4 280.4 0.8 14.4 1.0

Buy

Founded on August 15, 1907, Indian Bank has a pan-India presence with 2380 branches and 2189 ATMs across the country. It also has 3 overseas branches at Singapore, Colombo and Jaffna. Over the years it has established lucrative corporate, retail and SME banking businesses with an asset size of Rs 1877.1bn as on September 30, 2014. Investment Rationale • Indian Bank is one of the few PSU banks which has a good Capital Adequacy Ratio of 13.05% with a high Tier I capital ratio at 10.6%. As a result, it is in one of the best positions to grow its loan book when the economy starts reviving and the capex cycle picks up. We expect the bank’s loan book to grow at a CAGR of 13.7% over FY14-FY17E to Rs 1797.6bn in FY17E. • The bank plans to grow its branch network by 7-8% per year and plans to open 20% of the new branches in unbanked/rural locations with higher CASA potential. Also 60% of new branches will come in locations other than South India, thus enabling it diversify geographically. • NIM is expected to improve from a low of 2.6% (Reported NIM) in FY14 to 3% in FY17E due to improvement in the CASA ratio, decline in funding costs due to decline in interest rates and change in loan mix towards higher yielding retail and SME advances. • Good potential for fee income growth once credit growth revives. Also 22% of investments in AFS and high AFS duration of 4.77 years will ensure good treasury income. • Going ahead, as 20% of the banks work force, which is at higher cost than newer employees (40% of workforce joined in past 5 years), retires in next 5 years and income growth picks up, we expect the cost to income ratio to decline to 44.5% in FY17E from 49.4% in FY14. • The gross NPA levels are expected to improve from a peak of 4.2% in Q2FY15 to 2.6% in FY17E aided by falling slippages and increasing recoveries and upgrades. • The bank has a growing and profitable international business with 3 branches in Jaffna, Colombo and Singapore where it enjoys NIM close to 2%, as against 1% in case of peer banks having international presence. Valuations We have valued Indian Bank at 1.07x its FY17E ABV, which gives us a FY17E target price of Rs 300. Due to the bank’s strong positioning in South and other key markets, growth potential because of strong capital position, expected improvement in margins, cost ratios and asset quality, also attractive valuations at 0.8x FY17E ABV of Rs 280.4, we recommend a ‘Buy’ on Indian Bank.

Quantum Securities Company Profile Founded on August 15, 1907, Indian Bank has a pan-India presence with 2380 branches and 2189 ATMs across the country. It also has 3 overseas branches at Singapore, Colombo and Jaffna. Over the years it has established lucrative corporate, retail and SME banking businesses with an asset size of Rs 1877.1bn as on September 30, 2014. Key Management Personnel Name T. M. Bhasin B. Raj Kumar Mahesh Kumar Jain Source: Company

Designation Chairman & Managing Director Executive Director Executive Director

Investment Rationale To Expand Branch Network To Increase Presence Geographically Indian Bank had 2380 branches as on September 30, 2014. It had opened 110 branches in H1FY15 and plans to open another 100 branches in H2FY15. Around 20% of its new branches will be opened in unbanked and rural locations. At present, 29% of its branches are in rural locations as a result of which it has a decent CASA ratio of 28%. Region-wise 63% of the branches are in South India. As per the bank’s strategy, it will open 60% of new branches in regions other than South India in order to diversify its geographic presence. It plans to grow its new branches by 7-8% per year.

Source: Company, QS Research


Indian Bank – Initiating Coverage

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Quantum Securities


Poised to Grow With Good Capital Position Indian Bank is one of the few PSU banks which has not asked for capital infusion since long and at present its Capital Adequacy Ratio stands at 13.05% with Tier I capital ratio at 10.6%. As a result, it is in one of the best positions to grow its loan book when the economy starts reviving and the capex cycle picks up. As compared to the peer PSU banks in terms of market capitalization and loan book size, its loan book grew the 2nd fastest at 17.5% CAGR over FY11-FY14.


Indian Bank’s current portfolio is tilted towards corporate advances, with the same constituting 50% of the total advances. Out of the corporate advances, infrastructure advances constitute 20% of the total advances. Within the infrastructure segment, power sector loans constitute 11% of the total loan book. Within the power segment, SEBs constitute 43% of the power portfolio. Over the years as the bank has focused on growing its retail, SME and overseas books in the wake of sluggishness in the corporate segment, the proportion of corporate advances has come down from 55% in FY12 to 50% at present. As the bank plans to focus on growing its housing loan and SME loan books, the proportion of corporate advances is expected to decline to 46.5% in FY17E. We expect the bank’s loan book to grow at a CAGR of 13.7% over FY14-FY17E to Rs 1797.6bn in FY17E. This growth will be contributed by 13.4%, 9%, 22%, 22% and 16.2% CAGR in agriculture, corporate, retail, SME and overseas loans respectively during the same period.


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Quantum Securities


Growing and Profitable International Business Indian Bank has 3 overseas branches at Singapore, Colombo and Jaffna, through which it caters to the requirements of select Indian corporates and NRIs. The share of international business has increased from 4% in FY11 to 5.5% at present. As against other larger banks which are present in highly competitive international locations in Europe and USA and have overseas NIMs at around 1%, in case of Indian Bank, it enjoys an overseas NIM of ~2% by being present in strategic locations in South East Asia. Going ahead, as the international business sees an increase, it will add to the growth of the bank. Deposit Mix – Cost of Deposits and NIM to Improve Indian Bank’s NIM declined from 3.6% in FY10 to a low of 2.6% (NIM calculated by us is 2.8% for FY14) in FY14 due to fall in the CASA ratio from 32.2% in FY10 to a low 27.2% in FY14 (CASA ratio improved to 28% in H1FY15) and drop in yields due to increase in competition in the Southern market. However, in the past one year, the bank has shed Rs 90bn bulk deposits and in December 2014, the proportion of bulk deposits has come down to 6% of total deposits. In FY15E, the bank expects its CASA to grow by 12% and in future it expects to target a minimum CASA growth of 8% during any particular year. With the bank’s plans to open branches in CASA rich rural and unbanked locations and increasing contribution from the existing branches, the CASA ratio is expected to improve to 31% by FY17E, which will lead to decline in cost of funding. This coupled with a changing mix towards higher yielding retail and SME advances will lead to an improvement in NIMs to 3% by FY17E.



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Quantum Securities


Potential to Grow Fee and Other Income As the credit growth revives, the bank’s credit linked fee income is expected to pick up in line with the disbursement growth. The bank also has a tie up HDFC Standard Life Insurance Company to cross sell its insurance products to its customers. Besides this, the bank is expected to report good treasury gains in a declining interest rate scenario, as it had a higher proportion of AFS investments at 22% of investments with a duration of 4.77 years as on September 2014. The potential is also high for good growth in income from recoveries, as the asset quality improves with revival in the economy. We expect the bank’s other income to grow at a CAGR of 9.3% over FY14-FY17E from Rs 13.7bn in FY14 to Rs 18.3bn in FY17E. This growth will be driven by CAGR of 12.3% and 27.4% in the fee income and treasury income respectively during the same period. Cost to Income Ratio to Improve Indian Bank’s cost to income ratio increased from a low of 36.9% in FY11 to 49.4% in FY14 due to addition of 390 branches and 995 ATMs during the 3 year period and higher provisions for pension and wage revisions. At present, the average age of the bank’s employees is 48 years and around 40% of the banks employees have joined in the past 5 years. Going ahead, as 20% of the banks work force, which is at higher cost than newer employees, retires in next 5 years and the operating income grows by 18% and 20.3% in FY16E and FY17E respectively, while opex grows at lower rate of 12.2% and 14.1% in FY16E and FY17E respectively, we expect the cost to income ratio to decline to 44.5% in FY17E.



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Quantum Securities Asset Quality to Improve With 75% of restructured book and 51% of gross NPAs exposed to infrastructure, coal and mining, metals (including iron and steel) and textile sectors, improvement in the asset quality is dependent on economic revival and effective addressal of issues surrounding these sectors, by the present government. The bank’s slippage ratio peaked at 3.2% in FY13 and fell to 2.1% by Q2FY15 and as per management’s guidance slippages are expected to decline further in coming quarters and recoveries are expected to trend higher. We expect the gross NPA levels to improve from a peak of 4.2% in Q2FY15 to 2.6% in FY17E aided by falling slippages and increasing recoveries and upgrades. The bank’s restructured assets stood at Rs 115.6bn forming 9.7% of advances and of these 15.8% restructured assets have slipped into NPA. 40% of the restructured assets are Discoms and Air India which is not a cause of ma jor concern. The banks restructuring pipeline is expected to be negligible at Rs 1bn for the reminder of FY15E. It is expected to sell Rs 10bn assets to ARCs in H2FY15.


Return Ratios to See Improvement Indian Bank’s Return on Average Equity (RoAE) and Return on Average Assets (RoAA) declined from 20.2% and 1.7% in FY10 to a low of 7.7% and 0.6% in H1FY15. We expect RoAE and RoAA to improve to 14.4% and 1% in FY17E respectively, mainly aided by credit CAGR of 13.7% over FY14-FY17E, improvement in margins, cost ratios and asset quality during the same period.


Subsidiaries The bank has 2 subsidiaries (1) Indbank Housing Ltd (51% stake) which discontinued its operations in 2000 due to high NPAs and (2) Indbank Merchant Banking Services Ltd (64.84% stake) which is engaged in fee based capital market activities. Besides this, it has 35% stake each in Pallavan Grama Bank, Saptagiri Grameena Bank and Puduvai Bharathiar Grama Bank. As these entities’ financials are quite small as compared to the parent bank, we have not considered the same in the valuation of our target price. Indian Bank – Initiating Coverage

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Quantum Securities Best Case Scenario Following are our best case assumptions in case economic revival is faster than expected: (1) the bank grows its loan book by 19-21% over FY15E-FY17E as against our base case expectation of 15-16% during same period, (2) the NIM expands to 3.2% in FY17E as against base case expectation of 3%, (3) the opex growth remains lower at 15-16%, (4) recoveries and upgrades to asset quality are higher than the slippage rate. Then the RoAE and ABV as per best case scenario are expected to be at 17.1% and Rs 308.1 respectively in FY17E, as against our base case estimates of 14.4% and Rs 280.4 respectively. Parameter

Base Case FY16E 15.1 2.8 12.2 3.2 1.8 17195.1 0.8 11.2 234.0

Loan Growth (%) NIM (%) Opex Growth (%) Gross NPA (%) Net NPA (%) PAT (Rs mn) RoAA (%) RoAE (%) ABV (Rs) Source: QS Research

Best Case FY16E 19.1 3.0 15.2 2.5 1.4 20338.4 0.9 13.1 252.1

FY17E 16.1 3.0 14.1 2.6 1.4 24345.2 1.0 14.4 280.4

FY17E 21.1 3.2 16.3 2.3 1.0 29947.1 1.1 17.1 308.1

Valuations We have valued Indian Bank at 1.07x its FY17E ABV, which gives us a FY17E target price of Rs 300. Due to the bank’s strong positioning in the South and other key markets, growth potential because of strong capital position and expected improvement in margins, cost ratios and asset quality, also attractive valuations at 0.8x FY17E ABV of Rs 280.4, we recommend a ‘Buy’ on Indian Bank. Price Target Calculation Intrinsic P/BV FY17E Networth Excluding Revaluation Reserve (Rs mn) FY17E Net NPA (Rs mn) FY17E Adj. Networth Price Target (Rs) Source: QS Research

1.07 155269.6 24945.4 130324.3 300.2

Peer Comparison P/BV (x) CMP (Rs) 213.9 124.8 98.4

Mcap (Rs mn) 99408.0 67940.1 139805.5

Particulars FY15E FY16E Indian Bank 0.8 0.7 Allahabad Bank 0.6 0.6 Central Bank 2.3 2.1 Corporation Bank 341.9 57274.2 0.6 0.5 IOB 59.0 72885.7 0.7 0.7 IDBI 73.4 117650.5 0.5 0.5 OBC 314.6 94317.8 0.6 0.6 Syndicate Bank 126.5 79009.4 0.7 0.6 UCO Bank 80.1 81278.2 0.7 0.7 Average 89952.1 0.8 0.8 Source: QS Research, Bloomberg Consensus Estimates

P/E (x)

RoAA (%)

RoAE (%)

FY15E 8.3 8.3 23.4

FY16E 5.8 5.9 12.9

FY15E 0.6 0.4 0.2

FY16E 0.8 0.4 0.4

FY15E 8.4 7.3 4.6

FY16E 11.2 9.7 8.1

Loans H1FY15 1191.0 1397.7 1863.2

6.1 14.0 10.2 7.1 5.0 7.5 10.0

4.9 9.0 7.5 6.1 4.2 6.4 7.0

0.4 0.2 0.4 0.6 0.6 0.4 0.4

0.4 0.2 0.4 0.6 0.6 0.4 0.5

8.2 3.9 5.2 9.4 13.2 9.9 7.8

9.5 4.7 6.7 9.9 14.2 10.8 9.4

1360.3 1773.1 1950.6 1382.0 1738.4 1395.2 1561.3

Note: Indian Bank trades at an attractive valuation of 0.7x its FY16E book value as against peer group average of 0.8x FY16E book value. As the banks RoAE and RoAA improve to 14.4% and 1% in FY17E it will deserve better valuations.


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Quantum Securities Investment Concerns • Delayed economic recovery can impact growth. • Slippage in asset quality beyond our estimates. • Compression in margins due to high competition. • Mr. T. M. Bhasin is due for retirement in March 2015. With the change of guard, the bank’s strategy may change significantly which can be an upside or downside risk. • Single geography risk because of over 60% branches in South India.

Source: QS Research


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Quantum Securities Income Statement Particulars (Rs mn) - Y/E March Interest on Advances Income from Investments Interest on Balances with RBI Others Interest Interest Earned % Change YoY Interest Expended % Change YoY Net Interest Income (NII) % Change YoY Other Income Net Income Earned % Change YoY Payments to Employees Depreciation Other Operating Expenses Operating Expenditure Pre Provisioning Profits % Change YoY Provisions and Contingencies Profit Before Tax Provison for Tax Net Profit % Change YoY

FY13 105835.6 32381.8 756.9 0.0 138974.3 13.6 93683.7 19.9 45290.5 2.5 12831.5 58122.1

FY14 114171.3 37281.3 1039.4 0.0 152492.1 9.7 108887.9 16.2 43604.2 -3.7 13716.8 57321.0

FY15E 123617.7 36790.9 1696.2 0.0 162104.8 6.3 114073.5 4.8 48031.3 10.2 13635.3 61666.6

FY16E 136212.9 40111.0 2120.2 0.0 178444.1 10.1 121527.9 6.5 56916.2 18.5 15878.1 72794.4

FY17E 153618.9 44426.5 2650.3 0.0 200695.7 12.5 131367.3 8.1 69328.4 21.8 18259.9 87588.3

19738.9 909.4 6860.4 27508.6 30613.5 -11.6 12351.2 18262.3 2450.9 15811.4 -9.5

19267.9 1045.7 8001.4 28315.0 29006.0 -5.3 14249.3 14756.8 3167.3 11589.5 -26.7

19628.1 1139.2 9689.0 30456.3 31210.4 7.6 15807.3 15403.1 3432.8 11970.3 3.3

22235.7 1293.1 10657.9 34186.7 38607.6 23.7 16276.3 22331.3 5136.2 17195.1 43.6

25917.8 1357.7 11723.7 38999.3 48589.0 25.9 16128.7 32460.3 8115.1 24345.2 41.6

Balance Sheet Particulars (Rs mn) - Y/E March SOURCES OF FUNDS Equity Capital Preference Capital Reserves Net Worth Demand Deposits Savings Deposits Term Deposits Deposits Borrowings Other Liabilities Total Liabilities APPLICATION OF FUNDS Cash and Balances with RBI Balances with Banks Investments Net Advances Fixed Assets Other Assets Total Assets Contingent Liabilities Bills for Collection Total Business % Change YoY


FY13

FY14

FY15E

FY16E

FY17E

4297.7 4000.0 111426.6 119724.3 68465.4 323403.5 1027932.6 1419801.6 28625.6 60074.6 1628226.0

4648.5 0.0 134061.9 138710.4 71599.0 369006.5 1182142.7 1622748.2 49638.7 62169.7 1873267.0

4648.5 0.0 143040.9 147689.3 80190.9 420667.4 1288535.5 1789393.8 54602.6 68386.7 2060072.4

4648.5 0.0 155885.0 160533.5 99436.7 517420.9 1436717.1 2053574.7 62793.0 78644.7 2355545.9

4648.5 0.0 173975.7 178624.2 119324.0 620905.1 1645041.1 2385270.2 72839.9 91227.8 2727962.1

70642.4 25744.4 418049.8 1056425.5 16905.1 40458.8 1628226.0 363130.6 29804.2 2476227.0 17.3

77576.8 27328.6 469104.2 1222089.9 29321.8 47845.8 1873267.0 438854.2 28282.4 2844838.1 14.9

80522.7 19779.6 531262.9 1345088.9 30787.9 52630.3 2060072.4 482739.6 31110.7 3134482.8 10.2

92410.9 24204.5 597751.0 1548327.3 32327.3 60524.9 2355545.9 555150.5 35777.3 3601902.0 14.9

107337.2 20489.2 698336.5 1797646.7 33943.7 70208.9 2727962.1 643974.6 41501.6 4182916.9 16.1

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Quantum Securities

Dupont Analysis RoA Decomposition - Y/E March % of Average Assets Net Interest Income Non-Interest Income Net Income Operating Expenses Operating Profit Provisions Taxes RoA (%) Avg. Assets / Avg. Equity (x) RoE (%)

FY13

FY14

FY15E

FY16E

FY17E

3.0 0.8 3.8 1.8 2.0 0.8 0.2 1.0 13.4 13.9

2.5 0.8 3.3 1.6 1.7 0.8 0.2 0.7 13.5 9.0

2.4 0.7 3.1 1.5 1.6 0.8 0.2 0.6 13.7 8.4

2.6 0.7 3.3 1.5 1.7 0.7 0.2 0.8 14.3 11.2

2.7 0.7 3.4 1.5 1.9 0.6 0.3 1.0 15.0 14.4

Ratios Key Ratios - Y/E March Valuation EPS (Rs) Adj BVPS (Rs) PER (x) P/Adj BV (x) Dividend Yield (%) Payout (%) Growth (%) NII Advances Deposits Net Profit EPS Profitability (%) Yield on Advances Yield on Investments Cost of Deposits Cost of Funds Interest Spread Net Interest Margin Cost/Income CASA RoAE RoAA Balance Sheet Ratios Credit/Deposit Investment/Deposit Productivity Ratios (Rs mn) Business per Employee Profit per Employee Business per Branch Gross Profit per Branch Capital Adequacy (%) Capital to Risk Weighted Assets Ratio Tier I Capital Ratio Asset Quality (%) Gross NPA Net NPA Provision Coverage


FY13

FY14

FY15E

FY16E

FY17E

36.8 196.7 5.8 1.1 3.1 23.7

24.9 188.7 8.6 1.1 2.2 23.6

25.8 200.5 8.3 1.1 2.6 25.0

37.0 234.0 5.8 0.9 3.7 25.3

52.4 280.4 4.1 0.8 5.4 25.7

2.5 17.0 17.5 -9.5 -9.5

-3.7 15.7 14.3 -26.7 -32.2

10.2 10.1 10.3 3.3 3.3

18.5 15.1 14.8 43.6 43.6

21.8 16.1 16.2 41.6 41.6

10.8 8.1 6.9 6.7 3.4 3.3 47.3 27.6 13.9 1.0

10.0 8.4 7.0 6.7 2.9 2.8 49.4 27.2 9.0 0.7

9.6 7.4 6.5 6.3 2.8 2.7 49.4 28.0 8.4 0.6

9.4 7.1 6.1 5.9 3.0 2.8 47.0 30.0 11.2 0.8

9.2 6.9 5.7 5.5 3.1 3.0 44.5 31.0 14.4 1.0

74.4 29.4

75.3 28.9

75.2 29.7

75.4 29.1

75.4 29.3

131.2 0.8 1183.7 14.6

146.4 0.6 1262.7 12.9

153.4 0.6 1277.8 12.7

166.5 0.8 1359.6 14.6

180.9 1.1 1462.0 17.0

13.1 10.9

12.6 10.2

13.1 11.0

12.4 10.5

11.8 10.1

3.3 2.3 26.6

3.7 2.3 32.6

3.8 2.3 39.6

3.2 1.8 43.3

2.6 1.4 47.1

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Quantum Securities Notes:

Disclaimer: Quantum Securities Pvt. Ltd. (QSPL) offers discount and full service brokerage services and is not involved in any investment banking or merchant banking activities. This document is based on information obtained from sources believed to be reliable and due diligence has been conducted to that effect. We do not have any other material conflict of interest at the time of publication of the research report. Opinions & theories expressed are based on present circumstances & judgment and are subject to change without notice. Quantum Securities Pvt. Ltd. accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. If annualized returns are greater than 15%, then the stock is rated as BUY, between a range of 10-15% is rated as Accumulate. If annualized returns are lower than 15%, then the stock is rated as SELL and between a range of -10% to -15% is rated as Reduce. In the range of +/ (- ) 10%, the stock is rated as Hold. However, within this zone we may choose to give a n Accumulate, Reduce or Hold rating. Quantum Securities Pvt. Ltd. does not have any financial interest in the subject company and has not been engaged in market making activity for the subject company; QSPL or any of its associates have not received any compensation or other benefits from the subject company or third party in connection with the research report or any other compensation from the subject company in the past twelve months. Further, Rati J. Pandit, CFA has not served as an officer, director or employee of the subject company; QSPL does not have actual/beneficial ownership of one per cent or more of securities of the subject company, at the end of the month immediately preceding the date of publication of the research report.


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QS - Indian Bank - Initiating Coverage

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