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MOSL: INDIAN BANK (Buy)-Steady quarter-Earnings supported by higher treasury gains

INDIAN BANK: Steady quarter; Earnings supported by higher treasury gains

(INBK IN, Mkt Cap USD1.3b, CMP INR190, TP INR250, 32% Upside, Buy)

 

• 1QFY20 PAT of INR3.7b (significantly ahead of estimates), was led by higher treasury gains and lower provisions of INR7.9b (v/s est. of INR10.6b).
• NII declined 1% YoY to INR17.8b (in-line); however, domestic margins declined 10bp QoQ to 2.9% due to 5bp increase in cost of funds.
• Other income grew 58% YoY led by treasury gains of INR2.0b. Total income trailed opex growth of 16% YoY, resulting in modest PPoP growth of 6% YoY. C/I ratio stood at 44.6% (v/s 46.6% in 4QFY19).
• Loan book grew 12% YoY (2% QoQ decline) to INR1.8t while deposits grew 15% YoY to INR2.4t. Share of the RAM advances stood at 60.5% (v/s 56.4% in 1QFY19). CASA deposit growth moderated at 3.5% YoY, leading to a decline in CASA ratio to 34.2% (v/s 35.5% in FY19).
• Gross slippages stood at INR10.8b (v/s INR10.0b in 4QFY19) while recoveries/upgrades came in at INR3.4b/INR1.6b. Annualized slippage ratio stood at 2.6% (v/s 2.4% in 4QFY19). Thus, GNPA/NNPA ratio increased 22bp/9bp QoQ to 7.3%/3.8% due to sequential decline in advances, while the PCR ratio was broadly stable at 49.5% (PCR Inc. TWO stood at 66.3%).
• Other Highlights: (1) INBK has guided for slippages' run-rate of INR8-10b per quarter. (2) Exposure to DHFL stands at INR14.8b. (3) CET-1 improved ~40bp QoQ to 11.4% aided by issuance of INR2.9b raised in May'19 under the Employee Stock Purchase Scheme (CAR of 13.6%).
• Valuation view: INBK has reported steady performance aided by lower provisions and strong treasury gains. The bank has strong capital position with Tier-1 of 11.7%; thus, it is well-poised to sustain healthy loan growth (guidance of 15%). However, lower PCR at ~50% (excluding TWO), weak macros and exposure towards few standard stressed accounts, might keep credit cost elevated over FY20/21E. We have increased our other income estimates leading to ~17%/14% increase in our FY20/FY21 earnings. Thus, RoA/RoE should improve to 0.6%/11% by FY21E. Maintain Buy with a revised TP of INR250 (0.7x FY21E ABV).