Buy This Banking Stock For 26 Per Cent Gains Says Hdfc Securities

HDFC Securities’ take on Indian Bank:

Indian Bank is much better placed as it has not required much of support from the government. The bank’s asset quality paints a better picture in comparison to other peers.

No loss of a single rupee in the last decade

It is noteworthy that Indian bank despite the credit crisis faced by the industry for a quiet long time has not reported even a single penny of loss. Nonetheless, it has distributed dividends 7 times in the past ten years. Also, it has a diversified portfolio, and has active and increased focus in RAM segment or retail agriculture and MSME segment that will increase risk diversification, increased revenue as well as improved margins.

Cautious stance linked to high corporate book:

The brokerage is however concerned on the bank’s over position with respect to high corporate book. It has high BB & below rated book and has high exposure to sectors like Infrastructure, NBFC etc. Even the management is circumspect about retail and MSME segments for the coming quarters. However inexpensive valuation along with strong liability franchise and low cost of funds gives us comfort for the long term. It is a play on the gradual recovery in the Indian economy, adds the brokerage firm.

Banking sector can be up for Re-rating in case of Acquisitions in the space given the privatization buzz

The latest NARCL guarantee will augur positively chiefly for large PSBs. “Faster resolution by the IBC could also help in recoveries and bring down slippages in future. Privatization buzz has kept the PSU bank sector in limelight and we believe acquisition of some PSU Banks by the any prestigious corporates/Institutions – local or foreign – at a good valuation may rerate the sector”.

Valuation & Recommendation:

“We expect Indian Bank to grow its loan book at 9% CAGR while NII and Net profit are expected to grow at 7.5% and 39.5% (due to lower base) CAGR respectively over FY21-23E. ROAA is estimated to improve to 0.8% in FY23E from current 0.6% in FY21 and RoE could rise to 12.4% from 9.9% in FY21. We expect healthy recoveries and upgrades in next two years. Asset quality trend of corporate and MSME would be the crucial monitorables. Most of the concerns arising out of pending writeoffs out of restructured/SMA accounts are already in the price. We have assumed higher recoveries and lower slippages going forward. NIMs may also start stabilizing around 3% level. We believe that investors can buy Indian bank at LTP of Rs.139 (0.46xFY23E ABV) and add more at Rs.121 (0.4xFY23E ABV) for the base case fair value of Rs.158 (0.52xFY23E ABV) and for the bull case fair value of Rs.170.5 (0.56xFY23E ABV) over the next two quarters” adds the brokerage.

Long term Triggers that could propel the stock higher:

Capital adequacy ratio at the bank as of June 21 came in at 11.6 percent with tier I at 15.92 percent. In the just ended quarter, the bank via QIP raised a sum of Rs. 1650 crore in which shares were issued for Rs. 142.15 per share. . The bank had also raised Additional Tier 1 bonds and Tier 2 bonds of Rs.2,000 Cr each in FY21. Any asset quality lapse can be easily accommodated by the bank.

Amalgamation to be completed this year itself

The bank is in the process of completing integration with Allahabad Bank and likewise would generate synergies in the long run. Further, the amalgamation has resulted in larger balance sheet size and optimized capital utilization, wider geographic reach leading to deeper penetration, sharing and scale of product capabilities and platforms with greater cross sell across segments, increase in operational and process efficiencies through scale benefits and elimination of duplication.

Improved low cost funding base:

The management believes that they are able to maintain a relatively low-cost funding base as compared to other competitors, by leveraging strengths, expanding base of retail savings and current deposits, carrying out government business, and increasing the free float generated by transaction services. The cost of deposits and cost of funds have been consistently decreasing. This low cost fund helps the bank in creating edge over other private players, adds the report.

NARCL guarantee as well as SC order to invoke personal guarantee

NARCL security as well as the SC guideline to invoke personal guarantees in case of company default will also help in swifter recoveries.

Disclaimer:

The PSB stock is taken from the brokerage report of HDFC Securities and is not a recommendation to take position in the stock.

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