NOTE FOR INVESTMENT OPERATION COMMITTEE

MD & CEO CFO CRO CIO

INVESTMENT IN UNAPPROVED CATEGORY

APPROVAL FOR EQUITY INVESTMENT THROUGH QIP IN INDIAN BANK

We are submitting this proposal to permit us to invest in Indian Bank Ltd (unapproved
investment) through QIP for the amount of Rs 25Cr at QIP price .
Indian Bank Investment Rationale

 Indian Bank has been able to grow its net advances at a 10-Yr CAGR of 12% and a 5-Yr
CAGR of 9%, which is in line with the system credit growth and better than most of the
larger PSBs.
 Better performance during recent corporate asset quality cycle vs Peers -INBK’s
performance during the previous corporate asset quality cycle (FY15-19) was much
better than peers. Average rate of slippage seen for the bank was only 3.3% vs 3.6% for
SBI, 6.7% for PNB, 4.8% for Canara, 4.9% for BOB and 6.9% for BOI. PCR of the bank as of
Dec’20 stood at 69%, which is a fairly high number.
 Further, bank remains well capitalized with CET1 of 10.4% as of Dec’20. Capital raise by
the bank would further strengthen the balance sheet for growth once operating
environment improves.
 While most of the PSB’s and even including some of the larger private sector banks have
incurred losses during a financial year in the previous corporate credit cycle, Indian bank
has managed to remain profitable throughout.
 Valuation differential is attractive enough and potential upside of higher growth
prospects over the near-to-medium term.

Key Risk –

 While valuation is cheap, uncertainty around slippages in HY1FY22 is a key risks.

 The key risks are a slower pickup in India’s economic growth as a result of a prolonged
Covid-19 outbreak and a sharp rise in interest rates, which can reduce loan demand.

Valuations and Table

Particulars FY21 FY22E FY23E

NII (Rs Cr) 15,665 16,690 18,215
PPOP (Rs Cr) 11,396 11,975 13,144
Net Profit (Rs CR) 3,005 3,730 4,868
 EPS(Rs) 26.6 267.6 349.2
P/B(X) 0.41 0.42 0.38
ABVPS 340.1 335 370
RoE(%) 8.1% 8.8% 9.9%

View and Valuations :- Valuation of the company is much lower than peers . With higher
growth in business , Improving margins and lower stressed assets , stock may get Re-rating,
We are valuing the stock at 0.5X book on FY23E is giving a price of 185Rs. Hence we give a
“Subscribe” rating on its QIP offer.
Submitted for approval, please. Once approved and executed, the same would be placed
before IC for noting in the next IC meeting.

Research Analyst Equity Dealer

Research Analyst

18th June 2021

 Annexure- I
Financial Analysis -
Q4FY21 Performance :-

 INBK reported strong profitability with RoA/RoE of 1.1%/23% during Q4’21 and
0.5%/11% for FY21 partially aided by income tax reversal (PBT was 0.5%/0.5% of assets
during Q4’21/FY21) and moderation in credit cost to 1.9% during Q4’21 and 2.3% during
FY21.
 Capital adequacy ratio of the bank stood at 15.7% with CET1 of 11.3% as of Mar’21.
Improved capital adequacy was on account of strong internal capital generation.
 Liability franchise stands strengthened post-merger, benefits of which was seen in CASA
traction. CA/SA grew ~31%/12% YoY, with CASA ratio improving ~140bps YoY to 42.3%.
LCR stood at a healthy 162% while the CD ratio was 68%.
 GNPA/NNPA remained elevated at 9.9%/3.8% but they came down ~50bps/10bps
sequentially vs pro forma numbers reported in Q3’21. Restructured book was just
Rs23bn (63bps of advances) with ~63% of the restructuring coming from the SME
segment (2.1% of SME book was restructured). Restructured book in retail and
corporate was <0.5% of the respective portfolios. Stress remains elevated in
SME/Agri/Corp segments where GNPA was 12.3%/11.1%/9.9% respectively. Bank
however has PCR of 68% on overall NPA. 
 Overall, we expect bank’s performance on both asset quality as well as business growth
to improve further in coming quarter.

Financials:-
Promoter Analysis
We find no risk in Promoter quality as the promoter is Government of India with 88.06%
holding.
Macro-Economic outlook and Industry outlook
Sector Outlook :- Asset Quality may deteriorate after second wave of covid-19 however
provisions are adequately done, Despite subdued credit growth, banks reported stable- to
better margin trajectory, mainly due to low CoF. Fee income partly revived, and contained
opex led to healthy PPoP. Overall provisioning cost was moderate, leading to far better
than-expected profitability across banks. Delinquencies set to rise, but stress formation
could be moderate, given better collection trend.
Opening up for business with the drop in Covid cases, relaxation of lockdowns & staff
vaccinations. These have allowed for greater outbound work and should reflect better
collection trends in June and continue improving over 2Q-3Q. As the dip in activity wasn't
deep/long, rise should also be smoother. Nevertheless, most companies have
directly/indirectly built wave-3 in business plans/targets, so are likely to take a more
conservative stance on growth.
Lenders indicated that NPL recognition should be upfront in 1HFY22 as there are no
forbearances. Retail loans can see upfront recognition in 1Q, SME in 2Q whereas corp.
sector is holding-up quite well. Their buffer provision levels appear to be adequate, but
none of them plan to dip into surplus provisions - so credit costs will be higher in 1H. This is
in line with our estimates. PSU banks plan to offload their fully provided NPLs to National
ARC that can release mgt. bandwidth for growth, but clarity on timeline & valuations is
awaited. In our view, historically valuations & ability to resolve loans has been a key
impediment to success.
Banks are benefiting from rate, data and liquidity arbitrage: Customers are taking advantage
of the rate arbitrage available at banks (mainly in HL, Auto), while better data, liquidity and
expected moderate stress formation in back-book have made banks aggressive in gaining
market share.
Private banks have generally been at the forefront of growth, but this time, even PSBs are
trying to seize the growth momentum. Sequentially, we saw a sharp recovery in business
activity reflected by better fee income trends and reversal in operating expenses
Stock indicators (no of shares, Free float, avg return, etc)

Company Data
Shares O/S (mn) 4627
52-week range (Rs) 157-53
Market cap ( Cr) 15230
Free float(%) 12
3M - Avg daily vol (Cr) 400