Fresh investments with a three-year horizon can be considered in the stock of Indian Bank, a mid-size public sector bank. With high capital adequacy and room to raise further equity, the bank's growth does not face the constraints that other mid-size public sector banks do. These banks are receiving regular equity infusions from the Government, diluting their earnings. At the current price of Rs 237, the price-to-adjusted book value (book value as of FY13) is 0.95. The price-to-earnings multiple is also low at 4.7 times.

Indian Bank enjoys high capital adequacy of 11.2 per cent (tier-1 ratio) as against 8-9 per cent in the case of other banks. It also has significant headroom (Rs 6,200 crore) to raise tier-2 capital.

The Government holds 80 per cent stake, which will allow the bank to raise equity in future. At the macro level, the liquidity easing measures and expectation of rate cuts augur well for all banks. Margins will improve with the freeing up of liquidity following the cash reserve ratio cut. Falling rates may improve asset quality and provide investment gains on its treasury book.

Indian Bank's valuation seems attractive given that it enjoys strong net interest margins (3.57 per cent for the nine months ended December 2011), low cost-income ratio (at 37 per cent) and high provision coverage. The return on assets at 1.35 per cent annualised is also among the highest in the banking space.

The net profit of the bank grew at an annual rate of 19.3 per cent over the period 2007-08 to 2010-11. Even in the current fiscal, which saw margin shrinkage and higher provisions, the bank's profits grew by 10 per cent.

The advances book of Indian Bank grew at 19 per cent as of December, driven by agriculture and corporate lending, higher than the 15.9 per cent growth for the industry. Indian Bank has significant exposure to the infrastructure sector followed by gold loans and the textile sector. Things have started looking up for the power sector which accounts for a one-eight of its portfolio.

The restructured book accounts for 6.3 per cent of the total book. But slippages from the restructured book are far lower than its peers (6 per cent of the total restructured book).

The gross non-performing asset (NPA) ratio of the bank was 1.35 per cent. A fall in interest rates, introduction of credit guarantee scheme for the education sector (a big segment for Indian Bank) and agriculture credit subvention may contain asset quality pressures.

(This article was published on March 17, 2012)
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