Indian Bank

New innings
After restructuring its balance sheet, this southern PSU bank is now tapping the markets to fund its future growth

The Indian Bank, currently celebrating 100 years of operations, is tapping the capital markets to augment its capital base to meet Basel II standards. End September 2006, the bank’s capital adequacy ratio (CAR) was 12.02% (Tier I CAR: 9.84%) as against Reserve Bank of India (RBI) stipulation of 9%.

With roots in Chennai, Indian Bank has a pan-India presence. It had 1,408 branches end September 2006, spread over 26 states and three Union territories. The bank also has a branch in Singapore and a branch and a foreign-currency banking unit in Colombo, Sri Lanka. About 70.45% (992 branches) were in south India. Of this, almost 640 branches were in Tamil Nadu. Also, 59.07% and 37.22% of the loans and advances were from branches in south India.

Strengths:

• Net non-performing asset (NPA) to net advances has come down to an impressive 0.45% end September 2006, from as high as 8.30% in FY 2002.

• The credit-deposit ratio stood at 57.61% end September 2006 (40.93% in FY 2003). This is low compared with industry ratio, giving elbow-room to enhance lending portfolio.

Weaknesses:

• High portion of the funding requirement is met through term deposits. End September 2006, term deposits represented 64.09% of the total deposits, with savings and current deposits constituting 27.05% and 7.06%, respectively. Even though this lends the bank a stable source of funds, the cost is high.

• Like other PSU banks, Indian Bank depends on treasury income. In a rising interest-rate scenario, this will leave adverse effect on the profit growth rates. Almost 43% of the bank’s total income in FY 2006 and 37% of the total income in the six months ended September 2006 comes from treasury income. However, the bank has successfully brought down its dependence on treasury income from 55% in FY 2003 to 43% in FY 2006.

• The bank has a chequered past, which required huge write-offs. During the restructuring of its capital base in September 2006, aggregate accumulated unabsorbed losses of Rs 3830 crore were netted against the paid-up capital of Rs 4574 crore end March 2006. The retention of the balance Rs 743.82 crore were: Rs 400 crore in perpetual non-cumulative preference share capital and Rs 343.82 crore in equity share capital.

Valuation:

FY 2006 EPS on post-issue equity works out to Rs 11.4. Pre-IPO September 2006 book value stands at Rs 64. At the price band of Rs 77- Rs 91, PE works out to 6.8 to 8, and price/book value ratio 1.2 to 1.4. These are in line with those of its peers.