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Emkay Global
Indian Bank (Buy)
Target: ₹220
CMP: ₹137
Among the PSBs that were part of the recent consolidation, Indian Bank benefited the most from its merger with Allahabad Bank in terms of liability profile. Its proactive tech integration ensured a smooth transition, unlike Bank of Baroda. We believe Indian Bank is one of the best mid-cap PSBs with strong capital ratios across cycles and ability to deliver relatively stronger return ratios as growth accelerates.
Asset quality performance has been a mixed bag, with NPAs declining to 9.6 per cent from a peak of 12.7 per cent post-merger, but restructuring remains slightly high at 5 per cent of loans. Management believes that the bulk of retail (42 per cent) restructuring is toward mortgages and expects a lower relapse rate. The impact of RBI's norms on upgrading NPAs, subject to clearance of all dues, could have a limited impact in Q3.
Factoring in the impact of rising G-sec yields on treasury and a slightly higher tax rate from FY23E, we cut the bank's FY23-24 earnings by 5-6 per cent and still expect it to deliver healthy RoA/RoE of 0.8 per cent/13 per cent by FY24.
Valuations remain reasonable post the recent market-wide correction. Hence, we retain Buy with a revised target price of ₹220 (from earlier ₹235). Key risks: slow growth/higher NPAs in the SME segment due to a fresh Covid wave and delay in macro pick-up.
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