Emkay Global Financial has given Buy recommendation for Indian Bank with a target price of Rs. 220 in its research report issued on Dec 22, 2021
Emkay Global Financial’s report on Indian Bank
Among the PSBs that were part of the recent consolidation, Indian Bank benefited the most from its merger with Allahabad Bank in terms of liability profile (CASA >40%). Its proactive tech integration ensured a smooth transition, unlike BOB. We believe Indian Bank is one of the best mid-cap PSBs with strong capital ratios (CET 1 ~11.7%) across cycles and ability to deliver relatively stronger return ratios (RoA/RoE at 0.8%/13%) as growth accelerates. With strong capital buffers (CET1@11.7%) in place and overall NPAs trending down, it is gearing up to accelerate growth (~8% in FY22E; >10% in FY23E). This should be mainly driven by healthy traction in the RAM segment and back-end support from mid-corporates. Thus, better growth/LDR and lower interest reversals should support margins. Asset quality performance has been a mixed bag, with NPAs declining to 9.6% from a peak of 12.7% post-merger, but restructuring remains slightly high at 5% of loans. Management believes that the bulk of retail (42%) restructuring is toward mortgages and expects a lower relapse rate. The impact of RBI’s norms on upgrading NPAs, subject to clearance of all dues, could have a limited impact in Q3. Factoring in the impact of rising G-sec yields on treasury and a slightly higher tax rate from FY23E, we cut the bank’s FY23-24E earnings by 5-6% and still expect it to deliver healthy RoA/RoE of 0.8%/13% by FY24E. Valuations remain reasonable post the recent market-wide correction.
Hence, we retain Buy with a revised TP of Rs220 (0.7x Dec’23E ABV) from earlier Rs235. Key risks: slow growth/higher NPAs in the SME segment due to a fresh Covid wave and delay in macro pick-up.