Indian Bank NEUTRAL. Performance Highlights CMP. `178 Target Price - 2QFY2013 Result Update Banking. Investment Period - Key financials (Standalone)

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1 2QFY2013 Result Update Banking October 26, 2012 Indian Bank Performance Highlights Particulars (` cr) 2QFY13 2QFY13 % chg (qoq) 2QFY12 % chg (yoy) NII 1,120 1,153 (2.8) 1,135 (1.3) Preprov. profit (1.5) PAT During 2QFY2013, Indian Bank reported a poor operating performance, with flattish operating income and a 1.5% yoy decline in the operating profit. However, 8.2% yoy decline in provisioning expenses (on a base of higher investment provisioning in 2QFY2012 and writeback of contingent provision) as well as large `101cr interest on IT refund, aided the bank to report an earnings growth of 5.7% yoy. NIMs decline sequentially; Slippages higher due to one chunky account: The advances for the bank grew at a moderate pace of 10.8% yoy during 2QFY2013, mainly aided by a strong growth in the agri segments and the overseas book. Despite a 13.5% yoy growth in savings deposits, the growth in the lowcost CASA franchise remained moderate at 9.8% yoy, due to a 5.4% yoy decline in current deposits. The CASA ratio for the bank dipped 35bp sequentially to 29.0%. The reported NIM for the bank declined sequentially by 18bp to 3.3% largely due to a 16bp fall in the yield on advances on interest reversal of `26cr on slipped accounts and full impact of base rate reduction in May The growth in noninterest income (excluding treasury) for the bank remained muted at 3.7% yoy to `333cr, despite being aided by interest on IT refund amounting to `101cr. On the asset quality front, slippages came in at `734cr (which included one chunky account of `360cr currently referred to CDR) compared to `232cr in 1QFY2013 and quarterly average of `425cr since 1QFY2011. Annualized slippage ratio came in at 3.3%, much higher than 1.0% witnessed in 1QFY2013 and average run rate of 2.4% since 1QFY2011. On an absolute basis, both gross and net NPA levels increased by 27.4% and 30.8%, respectively. PCR for the bank dipped sequentially by 411bp to 71%. Additionally, the bank restructured ~`675cr worth of advances, thereby taking its outstanding restructured book to `10,349cr as of 2QFY2013. As per the management, no major restructuring is in the pipeline, except for the aforementioned exposure of ~`360cr under CDR. NEUTRAL CMP `178 Target Price Investment Period Stock Info Sector Banking Market Cap (` cr) 7,669 Beta Week High / Low 265/152 Avg. Daily Volume 22,179 Face Value (`) 10 BSE Sensex 18,625 Nifty 5,664 Reuters Code INBA.BO Bloomberg Code INBK@IN Shareholding Pattern (%) Promoters 80.0 MF / Banks / Indian Fls 5.4 FII / NRIs / OCBs 8.7 Indian Public / Others 5.9 Abs. (%) 3m 1yr 3yr Sensex Indian Bank (3.1) (12.1) 8.2 Outlook and valuation: The stock currently trades at 0.7x FY2014E ABV, below its eightyear trading range (0.8x1.3x) and median of 1.0x. However, in our view, upsides are likely to be lower than peers as we remain circumspect on the bank s high RoAs and remain cautious on its asset quality. Hence, we recommend a Neutral rating on the stock. Key financials (Standalone) Y/E March (` cr) FY2011 FY2012 FY2013E FY2014E NII 4,036 4,418 4,726 5,407 % chg Net profit 1,714 1,747 1,792 1,844 % chg NIM (%) EPS (`) P/E (x) P/ABV (x) RoA (%) RoE (%) Vaibhav Agrawal Ext: 6808 vaibhav.agrawal@angelbroking.com Varun Varma Ext: 6847 varun.varma@angelbroking.com Sourabh Taparia Ext: 6872 sourabh.taparia@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 2QFY2013 performance (Standalone) Particulars (` cr) 2QFY13 1QFY13 % chg (qoq) 2QFY12 % chg (yoy) 1HFY13 1HFY12 % chg (yoy) Interest earned 3,410 3, , ,784 5, on Advances / Bills 2,612 2, , ,222 4, on investments ,546 1, on balance with RBI & others Interest Expended 2,290 2, , ,511 3, Net Interest Income 1,120 1,153 (2.8) 1,135 (1.3) 2,273 2, Other income (0.9) Other income excl. treasury Fee Income (0.5) (3.3) Treasury Income (22.6) Recoveries from writeoff acc Operating income 1,484 1, , ,860 2, Operating expenses ,112 1, Employee expenses Other opex Preprovision Profit (1.5) 1,747 1, Provisions & Contingencies (8.2) (12.4) Provisions for NPAs Provisions for Investments (90.4) (93.0) Other provisions (58) (13) 62 PBT ,400 1, Provision for Tax (10.0) 232 (9.6) PAT Effective Tax Rate (%) (379)bp 33.1 (337)bp (128)bp Exhibit 2: 2QFY2013 Actual vs Angel estimates Particulars (` cr) Actual Estimates Var. (%) NII 1,120 1,200 (6.6) Noninterest income Operating income 1,484 1, Operating expenses Preprov. profit Provisions & cont (0.4) PBT Prov. for taxes (8.1) PAT October 26,

3 Exhibit 3: 2QFY2013 performance (Standalone) Particulars 2QFY13 1QFY13 % chg (qoq) 2QFY12 % chg (yoy) Balance sheet Advances (` cr) 95,000 93, , Deposits (` cr) 131, , , CredittoDeposit Ratio (%) (149)bp 73.8 (138)bp Current deposits (` cr) 6,448 6, ,813 (5.4) Saving deposits (` cr) 31,546 30, , CASA deposits (` cr) 37,994 37, , CASA ratio (%) (35)bp 29.8 (82)bp CAR (%) (2)bp bp Tier 1 CAR (%) (1)bp bp Profitability Ratios (%) Cost of deposits bp bp Yield on advances (16)bp 12.1 (94)bp Reported NIM (18)bp 3.8 (64)bp Costtoincome ratio (8)bp bp Asset quality Gross NPAs (` cr) 1,980 1, , Gross NPAs (%) bp bp Net NPAs (` cr) 1, Net NPAs (%) bp bp Provision Coverage Ratio (%) (411)bp 79.4 (838)bp Slippage ratio (%) bp bp NPA to avg. assets (%) bp bp Business growth moderates; NIMs decline sequentially During 2QFY2013, the bank s advances grew at a moderate pace of 10.8% yoy. Within advances, the overseas book grew by 20.9% (partly due to INR depreciation), while growth in the agriculture book was strong at 18.2% yoy. On the liability front, growth in deposits was relatively higher at 12.9% yoy. Despite a 13.5% yoy growth witnessed in savings deposits, growth in the lowcost CASA franchise remained moderate at 9.8% yoy, due to a 5.4% yoy decline witnessed in current deposits. Consequently, the CASA ratio for the bank dipped by 82bp yoy (35bp sequentially) to 29.0%. Reported NIMs for the bank declined sequentially by 18bp to 3.3% on lower yield on advances and slightly higher cost of deposits. The bank s yield on advances declined by 16bp qoq to 11.1% on account of both a) interest reversal of `26cr on slipped accounts and b) full impact of base rate reduction in May The cost of deposits was slightly higher by 6bp qoq to 7.1%. October 26,

4 Exhibit 4: Business growth moderates in 2QFY2013 Exhibit 5: CASA ratio declines sequentially Adv. yoy chg (%) Dep. yoy chg (%) CDR (%, RHS) CASA ratio (%) CASA yoy growth (%, RHS) Exhibit 6: 16bp qoq lower yield on advances led to... Exhibit 7:...18bp qoq fall in reported NIM (%) (%) Growth in noninterest income (excluding treasury) remained muted During 2QFY2013, the growth in noninterest income (excluding treasury) for the bank remained muted at 3.7% yoy to `333cr, despite being aided by interest on IT refund amounting to `101cr. The treasury income for the quarter came in at `30cr visàvis `21cr in 2QFY2012, while recoveries from writtenoff accounts were strong at `53cr compared to `40cr in 2QFY2012. Slippages higher due to one chunky account On the asset quality front, slippages came in at `734cr (included one chunky account of `360cr currently referred to CDR) compared to `232cr in 1QFY2013 and quarterly average of `425cr since 1QFY2011. The annualized slippage ratio came in at 3.3%, much higher than 1.0% witnessed in 1QFY2013 and average run rate of 2.4% since 1QFY2011. On an absolute basis, both gross and net NPA levels increased by 27.4% and 30.8%, respectively. While the gross NPA ratio increased by 40bp sequentially to 2.1% from 1.7% in 1QFY2013, the increase in the net NPA ratio was by 29bp to 1.3% from 1.0% in 1QFY2013. The Provisioning coverage ratio (PCR) for the bank dipped sequentially by 411bp to 71%. October 26,

5 During the quarter, the bank restructured ~`675cr worth of advances, thereby taking its outstanding restructured book to `10,349cr as of 2QFY2013. As per the management, no major restructuring is in the pipeline except for `360cr of the aforementioned exposure which is under CDR. Exhibit 8: Asset quality deteriorates sequentially Exhibit 9: Slippage ratio spikes in 2QFY Gross NPAs (%) Net NPAs (%) NPA coverage (%, RHS) Slippages (%) Credit cost (%, RHS) Exhibit 10: Costtoincome ratio stabilizes Exhibit 11: Opextoaverage asset trends Staff exps (` cr) Other opex (` cr) CIR (%, RHS) Costtoincome ratio (%) Opex to average assets (%, RHS) October 26,

6 Investment arguments Indian Bank's performance has broadly been positive and balanced since its listing in 2007, leading to a gradual improvement in the quality of earnings, visible amongst other things in the substantial ~50bp decline in the bank's operating costs as a percentage of assets. Rural and semiurban presence relatively high, moderate CASA Indian Bank opened 136 branches in the last 18 months, taking its total branch network to 1,999 as of 2QFY2013. The bank has a higher proportion of rural and semiurban presence (~55% of its total branches). Aided by this, the bank has been able to maintain a moderate CASA in the vicinity of 30%, with the CASA registering a 17.2% CAGR during FY Investment concerns Relatively high yields A larger portion of SME and midcorporate loans has contributed to the bank s relatively high yield on advances. This has supported its NIM, which in FY2012 was higher than even larger banks having ~40% CASA deposits vs Indian Bank s ~30%. Past experience shows that banks that delivered high NIMs on the back of high yields later paid the price for the higher risk taken in the form of higher NPAs in subsequent years. The bank had felt the heat on the assetquality front in 4QFY2012, with significant increase in slippages and higher restructuring. Even in 1HFY2013, though recoveries are higher mainly from the slippages of 4QFY2012, fresh slippages are still on the higher side and hence we remain cautious on the bank s asset quality and NIM outlook as in case of other banks with unsustainably high yields. Outlook and valuation The stock currently trades at 0.7x FY2014E ABV, below its eightyear trading range (0.8x1.3x) and median of 1.0x. However, in our view, upsides are likely to be lower than peers, as we remain circumspect on the bank s high RoAs and remain cautious on its asset quality. Hence, we recommend a Neutral rating on the stock. October 26,

7 Exhibit 12: Key assumptions Particulars (%) Earlier estimates Revised estimates FY2013E FY2014E FY2013E FY2014E Credit growth Deposit growth CASA ratio NIM Other income growth (9.1) 2.0 (6.8) (0.3) Growth in staff expenses Growth in other expenses Slippages Coverage ratio Exhibit 13: Change in estimates Particulars (` cr) Earlier estimates FY2013 Revised estimates % chg Earlier estimates FY2014 Revised estimates % chg NII 4,942 4,726 (4.4) 5,675 5,407 (4.7) Noninterest income 1,120 1, ,143 1, Operating income 6,062 5,874 (3.1) 6,818 6,551 (3.9) Operating expenses 2,346 2,346 2,697 2,697 Preprov. profit 3,716 3,528 (5.1) 4,121 3,854 (6.5) Provisions & cont. 1, (14.6) 1,406 1,124 (20.0) PBT 2,648 2,616 (1.2) 2,715 2, Prov. for taxes (4.1) PAT 1,789 1, ,834 1, Exhibit 14: P/ABV bands 600 Price(`) 0.5x 0.8x 1.1x 1.4x 1.7x Mar07 Jun07 Sep07 Dec07 Mar08 Jun08 Sep08 Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Dec10 Mar11 Jun11 Sep11 Dec11 Mar12 Jun12 Sep12 Dec12 Mar13 October 26,

8 Exhibit 15: Recommendation summary Company Reco. CMP (`) Tgt. Price (`) Upside (%) FY2014E P/ABV (x) FY2014E Tgt. P/ABV (x) FY2014E P/E (x) FY1214E CAGR in EPS (%) FY2014E RoA (%) FY2014E RoE (%) AxisBk Buy 1,231 1, FedBk Neutral HDFCBk Neutral ICICIBk* Buy 1,078 1, SIB Accumulate YesBk Buy AllBk Neutral (0.4) AndhBk Reduce (9.5) BOB Accumulate BOI Accumulate BOM Neutral CanBk Accumulate CentBk Neutral CorpBk Accumulate (2.2) DenaBk Neutral IDBI# Accumulate IndBk Neutral IOB Neutral J&KBk Neutral 1, OBC Neutral PNB Accumulate SBI* Accumulate 2,173 2, SynBk Neutral UcoBk Neutral UnionBk Accumulate UtdBk Buy VijBk Neutral ; Note: *Target multiples=sotp Target Price/ABV (including subsidiaries), # Without adjusting for SASF Company Background Indian Bank is a Chennaibased midsized public sector bank, with 1,999 branches and a balance sheet size of ~`1.5lakh cr. Around twothirds of the bank's branches are spread across the southern states with majority being in the parent state of Tamil Nadu (~43%). October 26,

9 Income statement (Standalone) Y/E March (` cr) FY08 FY09 FY10 FY11 FY12 FY13E FY14E NII 1,992 2,609 3,161 4,036 4,418 4,726 5,407 YoY Growth (%) Other Income 1,068 1,035 1,316 1,182 1,232 1,148 1,144 YoY Growth (%) 29.7 (3.0) 27.1 (10.2) 4.3 (6.8) (0.3) Operating Income 3,060 3,644 4,478 5,218 5,650 5,874 6,551 YoY Growth (%) Operating Expenses 1,400 1,415 1,730 1,926 2,187 2,346 2,697 YoY Growth (%) PreProvision Profit 1,659 2,229 2,747 3,292 3,463 3,528 3,854 YoY Growth (%) Prov. & Cont , ,124 YoY Growth (%) (24.8) 4.3 (10.6) (23.7) 23.2 Profit Before Tax 1,235 1,786 2,352 2,634 2,268 2,616 2,730 YoY Growth (%) (13.9) Prov. for Taxation as a % of PBT PAT 1,009 1,245 1,555 1,714 1,747 1,792 1,844 YoY Growth (%) Preference Dividend PAT avl. To equity sh ,203 1,509 1,668 1,701 1,745 1,798 YoY Growth (%) Balance sheet (Standalone) Y/E March (` cr) FY08 FY09 FY10 FY11 FY12 FY13E FY14E Share Capital Equity Preference Reserves & Surplus 4,381 6,306 7,442 8,691 9,972 11,317 12,715 Deposits 61,046 72,582 88, , , , ,374 Growth (%) Borrowings 1, ,783 4,302 4,931 Tier 2 Capital ,300 1,090 1,063 1,036 Other Liab. & Prov. 2,752 3,573 3,932 4,293 4,941 5,619 6,477 Total Liabilities 70,508 84, , , , , ,364 Cash Balances 6,433 6,212 7,061 6,878 6,319 6,197 6,335 Bank Balances ,052 1,684 2,494 2,837 3,252 Investments 21,915 22,801 28,268 34,784 37,976 44,002 50,875 Advances 39,839 51,465 62,146 75,250 90, , ,414 Growth (%) Fixed Assets 539 1,594 1,580 1,606 1,631 1,799 2,000 Other Assets 1,442 1,578 1,282 1,516 2,676 3,043 3,488 Total Assets 70,508 84, , , , , ,364 Growth (%) October 26,

10 Ratio analysis Y/E March FY08 FY09 FY10 FY11 FY12 FY13E FY14E Profitability ratios (%) NIMs Cost to Income Ratio RoA RoE B/S ratios (%) CASA Ratio Credit/Deposit Ratio CAR Tier I Asset Quality (%) Gross NPAs Net NPAs Slippages Loan loss prov. /avg. assets Provision Coverage Per Share Data (`) EPS ABVPS DPS Valuation Ratios PER (x) P/ABVPS (x) Dividend Yield DuPont Analysis (%) NII () Prov. Exp Adj. NII Treasury Int. Sens. Inc Other Inc Op. Inc Opex PBT Taxes RoA Leverage (x) RoE October 26,

11 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Indian Bank 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (5 to 5%) Reduce (5% to 15%) Sell (< 15%) October 26,