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At a time when most banks are struggling with mounting bad loans, state-run Indian Bank appears to have stemmed the rot by stepping up loan recoveries and conservative lending.
While the public sector bank has not been able to contain the rise in non-performing assets (NPAs) in the just-concluded October-December 2014 quarter, the pace of fresh bad loan additions has not accelerated sharply. This, along with the bank's efforts to recover loans, has restored some of the lost confidence on the stock.
The shares of Indian Bank gained five per cent after it announced its third quarter earnings on Monday.
The lender added Rs 869 crore of fresh NPAs during the quarter but of these, loans worth Rs 150 crore had already been upgraded, senior executives of the bank said. The Chennai-based bank also recovered Rs 175 crore in the quarter under review.
T M Bhasin, chairman and managing director of Indian Bank, is confident that the lender will be able to improve its credit quality in the coming quarters. “No one really wants to keep their accounts non-performing. In the next two or three quarters, things should take a positive turn on the asset quality front,” he told Business Standard.
At the end of December 2014, the bank had Rs 5,461 crore of gross bad loans, mainly due to slippages in small and mid-corporate loan accounts.
Bhasin claimed the bank's bad loans were still below the industry average and that the lender was continuing with day-to-day follow-up on accounts that had turned non-performing. The monitoring happens both at the zonal and the head office levels, depending on the ticket size of loans.
The gross and net NPA (GNPA and NNPA) ratios are also high at 4.52 per cent and 2.74 per cent, respectively. However, Bhasin said the ratios might have magnified as the bank had been cautious in growing its loan book. He added the bank was aiming to cut its gross and net NPA ratios to four per cent and 2.25 per cent, respectively, in the coming quarters.
Domestic advances increased 9.4 per cent on a year-on-year basis to Rs 1,14,722 crore at the end of the quarter. This was partly because of low credit demand from corporate groups, but also due to the bank’s reluctance to expand its loan book aggressively.
The pains of loan restructuring also seems to be easing with the bank restructuring Rs 163 crore in the third quarter of FY15. The total restructured book was Rs 11,777 crore, of which Rs 9,764 crore loans were standard at the end of December 2015.
Industry analysts have recommended their clients to buy shares of Indian Bank as they feel the current valuation of the stock is inexpensive. “At the current market price, the stock is trading at 0.58x FY16E ABV (adjusted book value). We recommend ‘buy’ rating on the stock,” said Vaibhav Agrawal, vice-president (research – banking) at Angel Broking, in a note to clients following the bank's third-quarter earnings announcement.
“Fresh NPA generation rate (2.6 per cent for H1 FY15) is lower than last two-year average of three per cent. We expect GNPA and NNPA to moderate to 2.28 per cent and 1.5 per cent by FY17E,” SPA Financial Advisors noted.
Restructured assets have surged, but the management does not see any major additions to the restructured asset if the economy improves from hereon.
“Stressed assets at 10.4 per cent of average advances are relatively better compared to other PSU (public sector unit) banks. PCR (provision coverage ratio) stands at 57.4 per cent as on H1FY15," said in the report.
