Indian Bank : Buy, 63 % Upside
Call & Research Report by Emkay Global Research
Report Date: 20 July 2021
CMP Rs. 138, Target Rs. 225
Target Period : Not given
■ Indian Bank has benefited the most from the merger with Allahabad Bank(CASA@41%) and has largely completed the integration process. It is now gearing up to accelerate growth with a strong capital buffer (CET 1 of 11.6% post recent QIP). We expect a sharp improvement in RoE to 13% by FY24E from 4% post-merger in FY20. We upgrade it to Buy with a revised TP of Rs225 (0.7x Jun’23E ABV).
■ In Q1, the bank once again delivered a strong beat on PAT at Rs11.8bn (est. Rs7.7bn), mainly driven by better NIMs, higher other income, and tax reversal benefits from c/fwd accumulated losses. Despite higher slippages (mainly in SME), GNPA moderated further to 9.7% due to aggressive w-offs.
■ We believe that the transfer of NPAs to NARCL (Rs50bn/1.3% of loans), including Rs19bn in Phase-1, and accelerating lumpy resolutions (DHFL/ILFS) will meaningfully reduce NPAs. The bank has a reasonably lower NNPA among PSBs at 3.5%, and targets to reduce it to <2% led by higher PCR.
■ Although credit growth was subdued at 7% yoy in Q1, the bank expects it to improve to 10-12% by the year-end, driven by RAM (Retail, Agri, MSME) and mid-corporate segments. Thus, better LDR, coupled with lower interest reversals on NPAs, should drive core margins/profitability up. We raise FY22/23E EPS by 106%/45%, factoring in better growth/NIMs and lower LLP/tax.
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