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Indian Bank: Improving asset quality and cheap valuation make the counter attractive

The prime attraction of the Q4 results was improvement on the asset quality front where its net NPA declined 24 basis points to 2.5%.

, ET Bureau|
Updated: Jun 01, 2015, 08.07 AM IST
Indian Bank reported a healthy growth in its operating profit in the fourth quarter of 2014-15. Strong fee income, higher treasury income and healthy recovery from accounts that had been written off, helped the bank achieve this. Due to a strong growth in current deposits, its current and savings account ratio also improved yearon-year (y-o-y). Further, the bank's employee costs dipped 1.2% y-o-y. However, net profit fell 24% y-o-y due to the tax outgo of Rs 49 crore in the last quarter. A negative tax outgo (write back) of Rs 162 crore in the fourth quarter of last year, resulted in a net change in tax of Rs 211 crore, causing this fall in net profit.

Indian Bank: Improving asset quality and cheap valuation make the counter attractive
The prime attraction of the fourth quarter results, however, was improvement on the asset quality front. While its gross non-performing assets (NPA) declined 12 basis points (bps) quarter-onquarter to 4.4%, its net NPA declined 24 bps to 2.5%. Analysts feel this turnaround will continue because the lender's asset quality was deteriorating in the last five years due to the economic slowdown. Despite this small cut, gross and net NPA is placed significantly higher compared to its 2009-10 values of 1% and 0.5% respectively. The bank's asset quality is likely to improve due to the expected economic recovery. Also, the improvement in asset quality is expected to be faster because of the lender's lower exposure to power and steel sectors.

This mid-sized PSU bank, with around 2,400 branches, has seen credit grow at a compound annual growth rate (CAGR) of 19% in the past four years, while the industry growth rate is pegged at 17.4%. It also has a well-diversified loan book. Due to increased traction from retail, micro, small and medium enterprises, and agriculture, the bank is expected to maintain above-average industry growth rates in the coming years as well. Since the banks is well capitalised, it should be able to ride on the economic revival. With stability on asset quality front, its net profit is expected to grow at a CAGR of around 29% in the next two years.

Also, as the counter has massively underperformed in the past six months, the stock is trading at attractive levels. With a price to book ratio of 0.61 and a price to earnings ratio of 7.75, this counter is a must buy for any long-term value seeking player.

Indian Bank: Improving asset quality and cheap valuation make the counter attractiveIndian Bank: Improving asset quality and cheap valuation make the counter attractive

Selection Methodology: We pick the stock that has shown the maximum increase in 'consensus analyst rating' in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts.
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