Best PSU bank stock to buy for a 25 percent upside.

 

Healthy credit growth and improvement in the CASA ratio led to stable margins.

 Indian Bank reported healthy credit growth at 15% YoY/5% QoQ, mainly led by strong traction in retail, SME, and Agri loans. Retail, VF, and mortgages were the primary growth drivers, whereas PL growth was largely muted. The recent RBI push to have a re-look at co-lending arrangements has possibly eased lending in retail gold loans. Deposits too grew, at 11% YoY/ 5% QoQ, with CASA improving by 110bps QoQ to 41%, and leading to a nearly stable cost of deposits. This led to a 4-bps QoQ uptick in NIM to 3.44%. The Bank expects NIM to remain healthy on the back of steady LDR and a higher share (60%) of the MCLR book.

One of the lowest NNPAs/the highest specific PCR, among PSBs.

The bank’s fresh slippages were lower than expected at Rs12.7bn/1.1% of loans which, coupled with higher write-offs, led to a sharp 52-bps QoQ contraction in GNPA ratio to 4%. Indian Bank continues to report one of the lowest NNPA ratios, at 0.4%, and the highest specific PCR at 90%, among PSBs. Though the banking sector will contest the recent RBI draft IRACP guidelines calling for higher standard asset provisions on project financing loans, the Indian Bank believes that the impact for it will be low, given its limited exposure to project financing. Our ‘back of the envelope’ calculation suggests incremental std provision requirement in the worst case at 15bps of loans, while the bank carries an additional specific provision buffer of 80bps (assuming optimal specific PCR @70% vs the current 90%) and can thus be easily absorbed. 

Indian Bank, is our preferred pick among PSBs.

 We expect the bank to sustainably deliver 1.1-1.2% RoA/15-16% RoE over FY25-27E led by healthy margins, PSLC fees/treasury gains and contained opex. Higher CET 1@13.5% is likely to effectively absorb any ECL impact and designated MD&CEO Asheesh Pandey’s (ED BOM) credible all-around experience adds comfort. We retain BUY on Indian Bank, with a revised up TP of Rs650/share (earlier Rs550/share), valuing the bank at 1.2x FY26E ABV. Key risks: Macro-dislocation hurting the growth/asset-quality improvement trajectory, higher than expected standard provisions as per new IRACP norms/ECL impact, and merger of any other PSB, given the Bank’s otherwise strong fundamentals.

#stockstobuy,#stockmarket,#marketpost.