Indian Bank Retains BUY Rating With Rs900 Target Price by Emkay Global Financial

Emkay Global Financial has issued a positive research report on Indian Bank, reaffirming its 'BUY' rating and raising the target price to Rs900, based on a recent interaction with the bank's Managing Director and CEO, Binod Kumar. The report highlights the bank's strategic shift towards achieving sustainably higher profitability, even if it means moderating growth.

Key financial insights from the report include:

• Credit Growth: Indian Bank reported strong ~14% credit growth in the second quarter but has guided for a more conservative 10-12% growth for the full year, emphasizing margin protection.
• Non-Fund Business: The bank plans to significantly ramp up its non-fund business to boost fee income, which is currently considered relatively weak.
• Net Interest Margin (NIM): NIM is expected to moderate slightly in the third quarter due to the timing of Marginal Cost of Funds based Lending Rate (MCLR) pricing adjustments, but is projected to increase again in the fourth quarter, assuming no interest rate cuts.
• Expected Credit Loss (ECL): The implementation of ECL standards is estimated to impact the bank's Capital Adequacy Ratio (CAR) by approximately 150 basis points. However, Indian Bank is proactively making provisions to minimize this transitional impact, which is expected to begin from April 1, 2027.
• Profitability Outlook: The bank believes that improved operating leverage, particularly from reduced non-staff costs, and a stronger focus on fee generation will help offset potential moderations in Assets Under Construction (AUCA) recovery and ECL provisioning. This strategy is aimed at sustaining Return on Assets (RoA) above 1-1.1%.

Outlook and Risks

Emkay remains positive on Indian Bank due to its superior return profile and credible management. However, they are closely monitoring discussions around the consolidation of Public Sector Banks (PSBs) at the ministry level, where Indian Bank might play a role.

Impact

This report is likely to have a positive impact on Indian Bank's stock price, reinforcing investor confidence in its strategy and management. The retained 'BUY' rating and increased target price suggest potential upside for investors. The emphasis on profitability and proactive management of regulatory changes like ECL could set a positive precedent for other PSBs. The market will also be watching developments on PSB consolidation, which could introduce volatility or opportunity for Indian Bank.

Impact Rating: 7/10

Difficult Terms Explained

• Public Sector Banks (PSBs): Banks where the majority of shares are owned by the government.
• MD and CEO: Managing Director and Chief Executive Officer, the top executives overseeing a company's operations.
• Profitability: The ability of a company to earn money from its business.
• Credit Growth: The increase in the total amount of loans a bank has issued.
• Margins: The difference between a bank's revenue and its costs. Net Interest Margin (NIM) is a key measure here.
• Non-fund Business: Banking activities that generate income through fees rather than interest, such as selling insurance or mutual funds.
• Fees: Charges paid by customers for banking services.
• NIM (Net Interest Margin): The difference between the interest income a bank earns from its lending activities and the interest it pays out to depositors, expressed as a percentage of its interest-earning assets.
• MCLR (Marginal Cost of Funds based Lending Rate): The minimum interest rate at which a bank can lend money.
• 4Q: The fourth quarter of a company's financial year.
• Rate Cut: A reduction in interest rates by a central bank.
• ECL (Expected Credit Loss): A new accounting method requiring banks to estimate and set aside funds for future loan losses.
• CAR (Capital Adequacy Ratio): A measure of a bank's financial strength, indicating its ability to absorb losses, calculated as a percentage of risk-weighted assets.
• Provisions: Money set aside by a bank to cover potential losses on loans or other assets.
• Transitional Impact: The effect of adopting a new accounting standard or regulation during the period of change.
• Operating Leverage: How changes in sales volume affect a company's operating income; a company with high fixed costs has high operating leverage.
• Non-staff Cost: Expenses of running the bank, excluding salaries and employee benefits.
• AUCA Recovery: Recovery of assets related to construction or advances, often referring to the recovery of overdue loans.
• RoA (Return on Assets): A measure of how profitable a company is relative to its total assets.
• ABV (Adjusted Book Value): A valuation method for banks that adjusts the book value of equity for specific assets and liabilities.
• Consolidation: The process of merging companies, often within the same industry.