Indian Bank

INDIAN Bank is one of the oldest banks in the country. It is also one of the best-managed state run banks in India. Its performance in the last three years, since it absorbed all its accumulated losses in its capital, is at par with best in its industry. Investors are advised to consider it for long-term investment.
BUSINESS

Headquarted in Chennai, Indian Bank is a leading bank in South India with widespread presence in Tamil Nadu, Kerala, Andhra Pradesh and Pondicherry. It was nationalised in 1969. It is a medium-sized bank and its balance sheet size stood at Rs 84,122 crore in FY 2009. It has 1,642 branches.

In the current decade, the bank has seen a turn-around. At the end of March 2000, bad loans, or net non-performing assets, formed 16% of Indian bank’s net advances. In FY06 it absorbed all the losses in its capital, which fell to Rs 744 crore from Rs 4,574 crore in the previous year. Since then, Indian Bank’s profit has grown at compounded annual growth rate (CAGR) of 35% every year, while its balance sheet has grown at a CAGR of 21%. This shows that it has enough reach and scale to leverage.

GROWTH DRIVERS

Indian Bank’s performance is clearly a cut above most state-run banks, notorious for inconsistent performance that puts down investors. The bank has performed well on all quality parameters while maintaining an impressive growth rate, achieving a delicate balance that has eluded several of its peers.

For instance, its net interest margin (NIM) stood at more than 3.5% in last six financial years. The only banks, which can better Indian Bank on this count are Kotak Mahindra Bank, Federal Bank and HDFC Bank. Its return on assets (RoA), at 1.6% in FY 2009, was the highest across all banks.

Its bad loans formed less than 0.2% of its net advances at the end of the year. Only Punjab National Bank has better record than Indian Bank on this count. The composition of its lending portfolio is very much on the lines of other state-run banks: agriculture loans constituted 15%, SME loan formed 11% and corporate sector contributed 50% to total loan book.

That the bank’s performance is superior despite similar lending profile shows the efforts being put in to choose the customers. The bank is expanding its presence. It opened 101 new branches in FY 2009.

VALUATION

Indian Bank is trading at a price to earning (P/E) multiple of 4.8 times. This is lower than the average of smaller banks that are no match to it in performance.

This indicates that the stock market is not giving premium to its performance. Moreover, the earnings growth is far ahead of P/E, which shows that the possibility of rise in stock price is much higher. In terms of price-to-book value P/BV), the stock is trading at close to 1, which is the average at which other banks are trading. Even based on P/BV, the bank is not getting the premium it deserves in terms of valuations.

We think it will be re-rated some time in future and therefore advise long-term investors to buy the stock at current levels.

Federal Bank

Federal Bank has emerged as one of the fastest growing banks in the last three years. Investors are advised to consider exposure to the stock for the long term
Beta 0.8
Institutional Holding 70.1%
Dividend Yield 1.6%
P/E 8.4
M-Cap Rs 4143 cr

Federal Bank is the country’s fourth-largest private bank by balance sheet size. This oldgeneration private bank was set up at Travancore (modern-day Kerala) in 1931, six decades before the bigger newgeneration private banks came up post-reforms. A major chunk of its business is concentrated in the south and Kerala contributes almost half to its loan book. The bank has 624 branches in 24 states and is now increasing its presence in neighbouring states like Tamil Nadu, Andhra Pradesh and Karnataka. A market capitalisation of just over Rs 4,000 crore and a balancesheet size of Rs 39,000 crore make Federal Bank one of the smaller banks in the country, but it ranks high on many key parameters. The bank’s net interest margin (NIM) — which is a measure of spread between the cost of borrowing and yield on loans — was 4.1% in 2008-09, the highest reported by a small bank. Only Kotak Mahindra Bank and HDFC Bank fare better on this count. In fact, the bank has maintained an NIM of about 3.5% for seven years now.

Federal Bank has managed to reduce its non-performing assets (NPA) to one of the lowest within a decade. Its net NPAs formed 0.3% of net advances in 2008-09, bettered by only three other banks. In contrast, the bank was struggling with higher NPAs at the start of this decade as these unrecovered loans formed 10% of its advances in 2000-01.

A dose of capital infusion in 2007-08 improved the bank’s capital adequacy ratio (CAR) to 20.1%. As per the Reserve Bank of India norms, banks have to maintain a minimum CAR of 9%. This shows that Federal Bank has a sufficient capital base. However, the capital infusion has resulted in dilution of return on equity (RoE), which fell from 21.3% in 2006-07 to 12.1% in 2008-09. At the current levels of CAR, the bank does not need to raise capital like other banks and no further dilution is expected in near future. Federal Bank’s net profit has risen at an average rate of 30% in the last three financial years, making it one of the fast-growing banks in the country.

A diversified loans portfolio places the bank in a better position to tackle economic slowdown compared to its peers. Loans to corporate, retail and small and medium enterprises segments comprised 37%, 31% and 32% of the total loan portfolio in 2008-09. In the last five years, the bank has increased the share of retail loans in total lending. In 2003-04, retail loans formed only 19% of the loan book.

In a country that continues to face a shortage of housing units, Federal Bank’s strategy of focusing on home loans can not be better timed. In FY 2009 housing loans formed 59% of retail loan book. In fact, secured lending like mortgages helps maintain high asset quality.

The bank also holds 26% stake in life insurance company, which is a joint venture with IDBI Bank and Fortis Insurance Co.

Stock Views on Union Bank of India,

Mafatlal Securities on Union Bank of India - Buy Target Rs 205
Mafatlal Securities has recommended a buy rating on Union Bank of India with a target of Rs 205 in its September 11, 2008 research report. "At the current price of Rs 147.60 the scrip discounts its estimated EPS of FY09 and FY10 by 5.28x and 3.91x respectively. The scrip is currently trading at a PE ratio of 5.37x (TTM) which is at a discount of 39% to the industry PE of 7.45x. The scrip is trading at 1.10x and 0.88x of estimated BV of FY09 and FY10. We recommend a “BUY” on UNBK with a target price of Rs 205 and an investment horizon of one year," Mafatlal Securities' research report.

Anand Rathi on Punjab National Bank - Buy Target of Rs 515

Anand Rathi Securities has recommended to buy Punjab National Bank (PNB) between Rs 490 and Rs 495 with a stoploss of Rs 485 and a target of Rs 515 in its September 12, 2008 research report.

ICICIdirect.com on Tata Motors - Buy above 424

ICICIdirect.com has recommended to buy Tata Motors above Rs 425 with a stoploss of Rs 424 and target of Rs 427/435/higher in its September 12, 2008 report.

Deutsche Bank on Kotak Mahindra Bank - Target of Rs 600

Deutsche Bank has downgraded its rating on Kotak Mahindra Bank to Hold with a target of Rs 600