Indian Bank has enough resources to grow rapidly: Why it is stock pick of the week – The Economic Times

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SynopsisDue to its strong deposit base and high capital adequacy ratio, Indian Bank has enough resources to grow rapidly and corner market share from its peer banks in coming years, making it a favourite of analysts.

With the standstill in NPA recognition over, most banks have identified all pending non-performing assets (NPAs) in the fourth quarter of 2020-21 and Indian Bank is no exception. For instance, the gross and net NPA of Indian Bank increased to 9.85% and 3.37% respectively as on 31 March from 9.04% and 2.35% as on December 2020. However, analysts are getting bullish on this counter because the fourth quarter slippages were much lower than anticipated. Its restructured book, which is placed at 1.4% of its loans, is also lower than the initial estimates of around 3%. Part of the NPA jump in fourth quarter of 2020-21 can also be attributed to assets it inherited from Allahabad Bank, which was merged with Indian Bank in April 2020.

Though Indian Bank has fully recognised weak assets as on 31 March, pressure on net profit may continue for some more time because the same needs to be written off. To shore up net profit for 2020-21, Indian Bank made fewer provisions in the fourth quarter. Despite the increase in slippages, its provisions fell by 44% y-o-y. Due to the second covid wave and lockdowns, be ready for new slippages during April-June quarter and asset quality is expected to improve only gradually—once the economy is back to normal. However, there is no need for alarm on the asset quality front. Though this lower write off in the fourth quarter brought down its provision coverage ratio (PCR), its PCR is still placed at a comfortable level of 82.12%.

Analysts’ views

  • Buy: 8
  • Hold: 2
Relative Performance

Being a public sector retail bank, Indian Bank continues to do well on the deposits front. It also has high contribution from current and savings accounts (Casa) and the same grew by 14% y-o-y and 7% q-o-q in the fourth quarter taking its Casa ratio to 42% as on March 2021. Due to increase in Casa ratio, its cost of funds fell 27 basis points to 4.08%. Due to its strong deposit base and high capital adequacy ratio, which is placed at 15.7%, Indian Bank has adequate resources to grow rapidly and corner market share from its peer banks in coming years. Despite the recent jump in share price, its valuations are also at reasonable levels compared to other public sector banks.

Selection Methodology
We pick up the stock that has shown maximum increase in “consensus analyst rating” during the last 1 month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 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 will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 50 table.

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