Despite reporting a loss in the fourth quarter of 2018-19, analysts are getting bullish on Indian Bank. This is because the loss was due to increased provisioning. However, this increased provisioning has helped Indian Bank improve its provision coverage ratio to 65.7% from 60.9%, quarteron-quarter (q-o-q). It also helped the lender bring down its net nonperforming assets (NPAs) to Rs 6,793 crore from Rs 7,571 crore, and net NPA to 3.75% from 4.42%, q-o-q.
Indian Bank’s profitability will remain under pressure for some time due to increased provisioning. However, analysts are excited that slippage (new NPAs) during the quarter fell to multi-quarter lows. As most of the stressed corporate accounts have already been recognised, this trend is expected to continue in the coming years as well. For example, analysts now are expecting that its slippage in 2019-20 and 2020-21 will be around 2.7% and 2.2% respectively. The slippage in 2018-19 was 4.1%. Recoveries from large corporate accounts pending in the National Company Law Tribunal (NCLT) will also improve Indian Bank’s asset quality.
With the asset quality issue behind, Indian Bank is now getting aggressive on the loan growth front. The lender has reported 15% loan growth during the fourth quarter and this came from all segments—retail, agriculture and MSME segments reported 13%, 25% and 14% year-on-year growth, respectively.
Despite not raising capital or fund infusion from the government, Indian Bank’s capital adequacy ratio (CAR) is the best among public sector banks. This is because of internal accrual and low capital consumption. The bank’s management plans to bring down its cost-to-income ratio to around 43% in 2019-20 through organisational restructuring. With a CAR of 13.2% as on March 2019, Indian Bank is well-positioned to make the most of the growth opportunity and is expected to report around 16-17% loan growth in the coming two years.
Due to high provisioning, profitability and return ratios such return on assets (RoA) will remain under pressure in 2019-20 also. However, things are expected to show marked improvement in 2020-21 and should result in a rerating in the counter. The current low valuation—PB ratio is placed at just 0.74—is another factor that is has made this counter attractive. So, the long-term investors can use the current correction in this counter to get in.
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