Indian Bank’s (IBL) results are in line with our expectations at the operational level. But lower-than-expected MTM losses on the investment portfolio and the absence of provisions towards NPAs resulted in healthy net profit growth.
Reduced slippages and the write-back of NPAs post implementation of farm loan waiver scheme boosted asset quality during the recently concluded quarter.
On the operational front, NII grew 12% year-on-year (y-o-y) aided by strong business growth wherein advances increased by 46%. Fee income and robust recoveries fuelled a growth of 34% y-o-y in non-interest income. Against our estimate of a 30% decline, net profit for the quarter grew marginally by 2.6% to Rs2.2 billion.
With a large pipeline of sanctioned loans, IBL has guided for 25% credit growth in FY09. The increase in PLR and gradual reduction in bulk deposits would keep NII growth intact, while the likelihood of continued robustness in fee income coupled with strong recoveries would drive profitability.
However, the high proportion of investments in the AFS category is a major concern as these are vulnerable to interest rate movements.
We have revised our estimates for FY09 and FY10 upwards to factor in strong growth in non-interest income and recoveries. We have also revised our target to Rs149 from Rs132 and upgraded the stock from Hold to BUY. At the target price, the stock would trade at P/ABV of 1.2x and 1.1x on FY09 and FY10 respectively.