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A Buzzing Banking Story

Indian Bank has been powering its business with a diversified, tech-enabled foundation

This article appeared in the December, 2009 issue of Wealth Insight magazine that looks at Indian Bank as an investment possibility.

Profile

Indian Bank is a Chennai based public sector undertaking. It was established on 15 August, 1907 as part of the Swadeshi movement. In 1969, the Government of India nationalized most banks in the country, including this one.

Its market history is recent though, having been listed in March, 2006-07 fiscal. Like most other banks it too has a presence in segments such as  Treasury, Corporate/Wholesale Banking, Retail Banking and Other Banking Operations. The company has three subsidiaries namely: Indbank Merchant Banking Services Ltd, IndBank Housing Ltd. and IndFund Management Ltd. 

Promoters

The Government of India (GoI) holds an 80 per cent stake. Other than that, foreign institutional investors (FIIs) had the next largest interest in it through their market-based stockholding, but during the Bull Run (starting March 9, 2009) they have reduced it. Mutual funds had less than five per cent stake in the company, but they too have reduced their positions.

Investment Rationale

High Growth Rate

The bank’s business has grown steadily over the last 5 years, from Rs 530 billion in FY04 to Rs 1,244 billion in FY09. It was the fastest growing PSU bank in FY09. Most of its segments grew in double digit.

Rising Deposits and Advances

Its deposits have grown at a compounded annual growth rate (CAGR) of 19 per cent from Rs 303 billion in FY04 to Rs 726 billion in FY09. The advances have grown at a CAGR of 29 per cent, from Rs 141 billion in FY04 to Rs 518 billion in FY09. Deposits in FY09 have grown by 18.9 per cent, advances are up by 28.8 per cent and total business is up by 22.8 per cent. 

NIMs & NPAs

Net interest margins (NIMs) are pretty healthy at 3.45 per cent for the September quarter and 3.51 per cent for the HY10. With the lowest gross and net non-performing assets (NPAs) among PSU banks (0.89%, 0.18% respectively), this is one bank which has shown no sign of slippages this year. Recoveries of loans gone bad too have been strong, but this can taper off. 

New Tie-up

A new car loan venture with Tata Motors has been cleared, while the one with Hyundai is already in progress. This will help increase its market share in the segment wherever the bank has its branches (1,657 branches spread all over India). Expectations are that the hi-yield lending may pick up as retail’s share in loans rises. 

Urban and Semi-urban Connect

Non-metro (urban/semi-urban) branches have grown fast. In fact there has been a 20 per cent rise in ATM/debit card holders in H1FY10, which indicates a strong retail franchise-building effort by the bank. 

Risk & Concerns

Government Investment 

Indirect intervention by the government (the majority stakeholder) to lend under social-sector scheme, concessional lending and other such unremunerative exercises pose a grave risk. The farm debt waiver, or scheme of that nature, will hamper the bank. 

Pvt/Foreign Competition

An intensifying struggle for dominance has seen the aggressive, greater risk-taking private banks gaining ground in the domestic market. Foreign banks too have made similar inroads with their aggressive push, backed by a the strong skill-set of their employees. 

RBI Policy 

A systemic squeeze may happen if the Reserve Bank of India (RBI) starts tightening credit support faster than expected. RBI’s second quarter monetary policy review clearly indicated tightening/reversal of the current accommodative monetary stance. However, most analysts expect this process to be gradual. But, there is uncertainty here as rising inflation may force RBI into a faster-than-expected withdrawal of liquidity, which will raise in interest rates. 

Crude Surge

Oil imports constitute about 30 per cent of India’s import bill. The current year-to-date (YTD) average crude oil price is about $66 per barrel compared to $ 86 in FY09. 

Any significant surge in crude oil prices will impact balance of payments, which in turn will also impact domestic liquidity. 

Valuation

Indian Bank has given a guidance of 20 per cent growth in advances and a 17 per cent growth in deposits in FY10. It is expected that the total business will touch Rs 1.5 lakh crore in FY10. 

On a price-to-equity (P/E) basis, the bank is trading at ~5x FY10 and under 4.4x FY11 estimated earnings.